Decreasing Downside Risk Aversion and Background Risk

12 Pages Posted: 10 Feb 2014 Last revised: 8 Nov 2014

See all articles by David Crainich

David Crainich

Catholic University of Lille - Faculté Libre des Sciences Economiques (FLSE)

Louis Eeckhoudt

Catholic University of Lille - IESEG School of Management

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Date Written: February 8, 2014

Abstract

In this paper, we indicate that risk vulnerability can be associated with the concept of downside risk aversion (DRA) and an assumption about its behavior, namely that it is decreasing in wealth. Specifically, decreasing downside risk aversion in the Arrow-Pratt and Ross senses are respectively necessary and sufficient for a background risk to raise the aversion to other independent risks.

Keywords: Downside Risk Aversion, Background Risk, Risk Vulnerability

JEL Classification: D81

Suggested Citation

Crainich, David and Eeckhoudt, Louis and Le Courtois, Olivier Arnaud, Decreasing Downside Risk Aversion and Background Risk (February 8, 2014). Journal of Mathematical Economics, 53, 2014. Available at SSRN: https://ssrn.com/abstract=2392736 or http://dx.doi.org/10.2139/ssrn.2392736

David Crainich (Contact Author)

Catholic University of Lille - Faculté Libre des Sciences Economiques (FLSE) ( email )

60 Boulevard Vauban
Lille Cedex, 59030
France

Louis Eeckhoudt

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France

Olivier Arnaud Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

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