AN ECONOMIC INDEX OF RISKINESS

Roberto Serrano () and Robert J. Aumann

Working Papers from CEMFI

Abstract: Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a “duality” axiom which, roughly speaking, asserts that less risk-averse individuals accept riskier gambles. The index is positively homogeneous, continuous, and subadditive, respects first and second order stochastic dominance, and for normally distributed gambles, is half of variance/mean. Examples are calculated, additional properties derived, and the index is compared with others.

Keywords: Riskiness; risk aversion; expected utility; decision making under uncertainty; portfolio choice; Sharpe ratio; value at risk; coherent measures of risk. (search for similar items in EconPapers)
JEL-codes: C00 C43 D00 D80 D81 E44 G00 (search for similar items in EconPapers)
Date: 2007-06
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Related works:
Working Paper: An Economic Index of Riskiness (2007)
Working Paper: An Economic Index of Riskiness (2006)
Working Paper: An economic index of riskiness (2007)
Working Paper: An Economic Index of Riskiness (2006)
Working Paper: An Economic Index of Riskiness (2007)
Journal Article: An Economic Index of Riskiness (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:cmf:wpaper:wp2007_0706

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