First-order (Conditional) Risk Aversion, Background Risk and Risk Diversification

Georges Dionne () and Jingyuan Li

Cahiers de recherche from CIRPEE

Abstract: In the literature, utility functions in the expected utility class are generically limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either first-order or second-order (conditional) risk aversion. This paper extends the concepts of order of conditional risk aversion to orders of conditional dependent risk aversion. We show that first-order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis. We relate our results to risk diversification and provide additional insights into its application in different economic and finance examples.

Keywords: Expected utility theory; first-order conditional dependent risk aversion; background risk; risk diversification (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1111

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