Disparity, Shortfall, and Twice-Endogenous HARA Utility

14 Pages Posted: 27 Aug 2011

See all articles by Todd B. Walker

Todd B. Walker

Indiana University Bloomington - Department of Economics

M. Ryan Haley

University of Wisconsin - Oshkosh

M. Kevin McGee

University of Wisconsin - Oshkosh

Date Written: December 4, 2010

Abstract

We derive a mapping between the shortfall-minimizing portfolio selection based on higher order entropy measures and expected utility theory. We show that the family of HARA utility functions has a minimum-divergence, shortfall-based representation. This facilitates an interpretation in which the risk aversion parameters and the type of risk aversion arise endogenously. We provide a numerical example illustrating this interpretation.

Keywords: Entropy, Measure Change, Cressie-Read, Endogenous Utility, Shortfall

JEL Classification: C44, G11, D03

Suggested Citation

Walker, Todd B. and Haley, M. Ryan and McGee, M. Kevin, Disparity, Shortfall, and Twice-Endogenous HARA Utility (December 4, 2010). Available at SSRN: https://ssrn.com/abstract=1918146 or http://dx.doi.org/10.2139/ssrn.1918146

Todd B. Walker (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

M. Ryan Haley

University of Wisconsin - Oshkosh ( email )

800 Algoma Blvd
Oshkosh, WI WI 54901
United States

M. Kevin McGee

University of Wisconsin - Oshkosh ( email )

800 Algoma Blvd
Oshkosh, WI WI 54901
United States

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