Comparing utility derivative premia under additive and multiplicative risks

Christoph Heinzel

Insurance: Mathematics and Economics, 2023, vol. 111, issue C, 23-40

Abstract: This paper develops the risk comparative statics of utility derivatives with a focus on utility premia. I compare extensions of two kinds of normalized premia: the “rate of substitution between nth- and mth-degree risk increases” (Liu and Meyer, 2013) and the “normalized utility premium” (Li and Liu, 2014). Under additive risk, those premia provide separate, but equivalent characterizations. Multiplicative risk, on the other hand, provides for distinct characterizations for the two premia. The comparative reasoning is illustrated at interpersonal precautionary saving comparisons and the intrapersonal conditions for decreasing Ross absolute and relative risk aversion.

Keywords: Utility premium; Multiplicative risk; Higher-order risk; Comparative risk aversion; Precautionary premium (search for similar items in EconPapers)
JEL-codes: D81 E21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:111:y:2023:i:c:p:23-40

DOI: 10.1016/j.insmatheco.2023.02.006

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