Conditional Value-at-Risk Constraint and Loss Aversion Utility Functions

Laetitia Andrieu, Michel De Lara and Babacar Seck
Additional contact information
Laetitia Andrieu: EDF R&D
Michel De Lara: CERMICS
Babacar Seck: CERMICS

Papers from arXiv.org

Abstract: We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in a classic expected return maximization problem. For what we call the infimum of expectations class of risk measures, we show that if the decision maker (DM) maximizes the expectation of a random return under constraint that the risk measure is bounded above, he then behaves as a ``generalized expected utility maximizer'' in the following sense. The DM exhibits ambiguity with respect to a family of utility functions defined on a larger set of decisions than the original one; he adopts pessimism and performs first a minimization of expected utility over this family, then performs a maximization over a new decisions set. This economic behaviour is called ``Maxmin under risk'' and studied by Maccheroni (2002). This economic interpretation allows us to exhibit a loss aversion factor when the risk measure is the Conditional Value-at-Risk.

Date: 2009-06
New Economics Papers: this item is included in nep-bec and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/0906.3425 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0906.3425

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().