Local Utility and Multivariate Risk Aversion

22 Pages Posted: 18 Jul 2012 Last revised: 26 Feb 2014

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 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. To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility, we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given 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 (June 18, 2012). CIRANO - Scientific Publications 2012s-17. Available at SSRN: https://ssrn.com/abstract=2112377 or http://dx.doi.org/10.2139/ssrn.2112377

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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