Higher-Order Risk Attitudes toward Correlation

18 Pages Posted: 28 May 2013 Last revised: 2 Jun 2013

See all articles by Jingyuan Li

Jingyuan Li

Lingnan University - Department of Finance and Insurance

Date Written: June 1, 2013

Abstract

Higher-order risk attitudes other than risk aversion (e.g., prudence and temperance) play vital roles both in theoretical and empirical work. While the literature has mainly focused on how they entail a preference for combining “good” outcomes with “bad” outcomes, we consider here an alternative approach which relates higher-order risk attitudes to the sign of correlation. The theoretical result in this paper proposes new insights into economic and financial applications such as risk aversion in the presence of another risk, bivariate stochastic dominance and justifying the first-order approach to moral hazard principal-agent problems.

Keywords: higher-order risk attitudes, stochastic dominance dependence, correlation, covariance

JEL Classification: D81

Suggested Citation

Li, Jingyuan, Higher-Order Risk Attitudes toward Correlation (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2270995 or http://dx.doi.org/10.2139/ssrn.2270995

Jingyuan Li (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China

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