Changes in multiplicative background risk and risk-taking behavior

Octave Jokung ()

Theory and Decision, 2013, vol. 74, issue 1, 127-149

Abstract: This article analyzes the conditions under which any change in a multiplicative background risk induces a more cautious behavior. We give necessary and sufficient conditions under which any change in the multiplicative background risk with respect to the Nth-degree stochastic dominance raises local risk aversion. Surprisingly, decreasing relative risk aversion of any order up to N in the sense of Pratt (Econometrica 32:122–136, 1964 ) coupled with decreasing relative risk aversion in the sense of Ross (Econometrica 49:631–638, 1981 ) are sufficient to guarantee an increase in local risk aversion after any deterioration of the multiplicative background risk thanks to the Nth-degree stochastic dominance. We link our results concerning second-order stochastic dominance with the concept of multiplicative risk vulnerability. Copyright Springer Science+Business Media New York 2013

Keywords: Background risk; Comparative risk; Increase in risk; Risk aversion; Risk vulnerability; Stochastic dominance; D81 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:theord:v:74:y:2013:i:1:p:127-149

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DOI: 10.1007/s11238-012-9336-1

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