Decreasing Downside Risk Aversion and Background Risk
12 Pages Posted: 10 Feb 2014 Last revised: 8 Nov 2014
Date Written: February 8, 2014
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: Suggested Citation