Certainty equivalent measures of risk

Alexander Vinel and Pavlo A. Krokhmal ()
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Alexander Vinel: 3131 Seamans Center for the Engineering Arts and Sciences
Pavlo A. Krokhmal: 3131 Seamans Center for the Engineering Arts and Sciences

Annals of Operations Research, 2017, vol. 249, issue 1, No 6, 75-95

Abstract: Abstract We study a framework for constructing coherent and convex measures of risk that is inspired by infimal convolution operator, and which is shown to constitute a new general representation of these classes of risk functions. We then discuss how this scheme may be effectively applied to obtain a class of certainty equivalent measures of risk that can directly incorporate preferences of a rational decision maker as expressed by a utility function. This approach is consequently employed to introduce a new family of measures, the log-exponential convex measures of risk. Conducted numerical experiments show that this family can be a useful tool for modeling of risk-averse preferences in decision making problems with heavy-tailed distributions of uncertain parameters.

Keywords: Coherent measures of risk; Convex measures of risk; Stochastic optimization; Risk-averse preferences; Utility theory; Log-exponential convex measures of risk (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s10479-015-1801-0

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