Can the Sufficient Conditions Used to Sign the Global Effect of Risk Be Used to Sign the Marginal Effect of Risk?

Wayne Simpson, Robert Sproule and Derek Hum

Bulletin of Economic Research, 1995, vol. 47, issue 4, 305-19

Abstract: Despite the absence of a formal definition of the relationship between the marginal and the global effects of risk, in the literature termed the economics of uncertainty, intuition would suggest it unjustifiable to presume that these two concepts are categorically independent. This paper demonstrates in two steps that such intuition is (in some degree) correct. First, a special case of the marginal effect is defined and called the "marginal effect in the small." Second, it is demonstrated that the sign of the marginal effect in the small is identical to the sign of the global effect of risk. In an effort to further establish the significance of this result, it is observed that (by implication) sufficient conditions used for signing the global effect can concomitantly serve as sufficient conditions for signing the marginal effect in the small (as well as the converse). In addition, three applications are considered. Copyright 1995 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1995
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