Local Utility and Multivariate Risk Aversion

23 Pages Posted: 10 Jan 2012 Last revised: 17 Jan 2015

Arthur Charpentier

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE)

Alfred Galichon

NYU, Department of Economics and Courant Institute

Marc Henry

Pennsylvania State University

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Date Written: January 10, 2012

Abstract

We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. Using martingale embedding techniques, we show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina's result in Machina (1982). To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility of Galichon and Henry (2011), we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given in Landsberger and Meilijson (1994) still holds in the multivariate case.

Keywords: local utility, multivariate risk aversion, multivariate rank dependent utility, pessimism, multivariate Bickel-Lehmann dispersion

JEL Classification: D63, D81, C61

Suggested Citation

Charpentier, Arthur and Galichon, Alfred and Henry, Marc, Local Utility and Multivariate Risk Aversion (January 10, 2012). Available at SSRN: https://ssrn.com/abstract=1982293 or http://dx.doi.org/10.2139/ssrn.1982293

Arthur Charpentier

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE) ( email )

92245 Malakoff Cedex
France

Alfred Galichon

NYU, Department of Economics and Courant Institute ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

Marc Henry (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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