Greater Downside Risk Aversion

Donald Keenan and Arthur Snow

Journal of Risk and Uncertainty, 2002, vol. 24, issue 3, 267-77

Abstract: Although investors are concerned foremost with mean and variance, they are also sensitive to downside risk. In this paper, we introduce an index of downside risk aversion to distinguish risk aversion from higher-order aspects of risk preference, including prudence. We show that the index of downside risk aversion S increases with monotonic downside risk averse transformations of utility, thereby directly linking S to the definition of downside risk aversion introduced by Menezes, et al. (1980). Although the index S applies equally to risk averse and risk loving decision makers, for a given positive degree of risk aversion, S is greater when the index of prudence is greater and vice versa. Copyright 2002 by Kluwer Academic Publishers

Date: 2002
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