Comparative Ross Risk Aversion in the Presence of Mean Dependent Risks

25 Pages Posted: 10 Feb 2012 Last revised: 5 Apr 2019

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Jingyuan Li

Lingnan University - Department of Finance and Insurance

Date Written: February 11, 2013

Abstract

This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Our contribution differs from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessarily mean independent, and may be conditional expectation increasing or decreasing. We show that our order of cross Ross risk aversion is equivalent to the order of partial risk premium, while our index of decreasing cross Ross risk aversion is equivalent to decreasing partial risk premium. These results generalize the comparative risk aversion model developed by Ross for mean independent risks. Our theoretical results propose new insights into comparing the welfare costs of business cycles and are related to utility functions having the n-switch independence property. They can be applied to many other economic situations implying a background risk.

Keywords: Comparative cross Ross risk aversion, dependent background risk, partial risk premium, decreasing cross Ross risk aversion, n-switch independence property

JEL Classification: D81

Suggested Citation

Dionne, Georges and Li, Jingyuan, Comparative Ross Risk Aversion in the Presence of Mean Dependent Risks (February 11, 2013). Available at SSRN: https://ssrn.com/abstract=2002047 or http://dx.doi.org/10.2139/ssrn.2002047

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Jingyuan Li

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China

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