Multiplicative Risk Prudence

8 Pages Posted: 28 Sep 2005

See all articles by George Wong

George Wong

The Hong Kong Polytechnic University

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Date Written: September 2005

Abstract

We examine the optimal saving decision of individuals who face a multiplicative risk. An individual is defined to be multiplicative risk prudent if multiplying a pure risk to her future wealth raises her optimal savings. We show that an individual is multiplicative risk prudent if and only if her relative risk prudence uniformly exceeds two. Our result suggests a more restrictive assumption that needs to be imposed on preferences for individuals to be risk prudent.

Keywords: Multiplicative risk, Risk prudence, Precautionary saving

JEL Classification: E21, D81

Suggested Citation

Wong, George and Chang, Xin, Multiplicative Risk Prudence (September 2005). Available at SSRN: https://ssrn.com/abstract=807924 or http://dx.doi.org/10.2139/ssrn.807924

George Wong (Contact Author)

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kowloon, 0
Hong Kong
852 3400 3459 (Phone)
852 2330 9845 (Fax)

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

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