Optimal Expected Utility Risk Measures

17 Pages Posted: 28 Aug 2015 Last revised: 30 Nov 2017

See all articles by Sebastian Geissel

Sebastian Geissel

University of Applied Sciences Brandenburg

Jörn Sass

University of Kaiserslautern - Department of Mathematics

Frank Thomas Seifried

University of Trier

Date Written: November 28, 2017

Abstract

This paper introduces optimal expected utility (OEU) risk measures, investigates their main properties and puts them in perspective to alternative risk measures and notions of certainty equivalents. Taking the investor’s point of view, OEU maximizes the sum of capital available today and the certainty equivalent of capital in the future. To the best of our knowledge, OEU is the only existing utility-based risk measure that is (non-trivial and) coherent if the utility function u has constant relative risk aversion. We present several different risk measures that can be derived with special choices of u and illustrate that OEU is more sensitive than value at risk and average value at risk with respect to changes of the probability of a financial loss.

Keywords: risk measure, certainty equivalent, utility maximization

Suggested Citation

Geissel, Sebastian and Sass, Jörn and Seifried, Frank Thomas, Optimal Expected Utility Risk Measures (November 28, 2017). Available at SSRN: https://ssrn.com/abstract=2651132 or http://dx.doi.org/10.2139/ssrn.2651132

Sebastian Geissel (Contact Author)

University of Applied Sciences Brandenburg ( email )

Brandenburg/Havel, 14770
Germany

Jörn Sass

University of Kaiserslautern - Department of Mathematics ( email )

D-67653 Kaiserslautern
Germany

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

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