Utility Functions of Equivalent Form and the Effect of Parameter Changes on Optimum Decision Making

Udo Broll, Harald L. Battermann and Jack E. Wahl

No 02/06, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

Abstract: We derive a class of utility functions that are equivalent with respect to a well-defined functional form. We study the case of constant relative risk aversion (of some order) to investigate on different equivalence relations in order to determine the, possibly infinite, number of equivalence classes when utility functions satisfy a specific form. Then we apply our results to standard applications in economics and finance, for example, to the effect of price volatility on optimum hedging.

Keywords: equivalence class; risk aversion; sensitivity analysis (search for similar items in EconPapers)
JEL-codes: D11 D81 G11 (search for similar items in EconPapers)
Date: 2006
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