Skewness Preference, Risk Aversion, and the Precedence Relations on Stochastic Changes

W. Henry Chiu ()
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W. Henry Chiu: School of Economic Studies, The University of Manchester, Manchester, M13 9PL, United Kingdom

Management Science, 2005, vol. 51, issue 12, 1816-1828

Abstract: This paper provides a general choice-theoretic characterization of the trade-off between risk and skewness, whose importance in understanding risk-taking behavior is well documented in empirical studies. The condition under which the prudence measure (Kimball 1990) characterizes the strength of an individual's downside-risk aversion against his own risk aversion is identified and interpreted in a unifying framework based on the concept of one stochastic dominant change preceding another and that of the desirability of a stochastic change. The framework is also shown to be useful for a better understanding of the Arrow-Pratt measure, the stronger Ross measure, and the coincidence of the characterizations of downside-risk aversion and prudence, as well as the relationship between stochastic dominances of different degrees.

Keywords: skewness preference; risk aversion; downside risk; Arrow-Pratt measure; prudence measure (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (62)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:51:y:2005:i:12:p:1816-1828

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