The Risk Substitution Rate as a Fundamental Risk Aversion Measure

Christoph Heinzel ()
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Christoph Heinzel: SMART - Structures et Marché Agricoles, Ressources et Territoires - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Rennes Angers - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement, INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: The risk substitution rate gauges the willingness to substitute mth- for nth-degree risk increases and can represent (n/m)th-degree Ross more risk aversion (Liu and Meyer 2013). Alternatively, generalizations of the Arrow-Pratt risk premium, Pratt's probability premium, and Jindapon and Neilson's paying for risk reductions approach can represent that risk aversion order (Liu and Neilson 2019). This note extends the latter measures to cover the attitudes determining the risk impacts on utility derivatives and to multiplicative risk and compares those measures to the generalized risk substitution rates in Heinzel (2023). Across all contexts, risk substitution rates provide not only for a homogeneous interpretation of the other measures, but yield themselves important quantifications. These relations may be helpful when studying related preferences.

Keywords: Risk aversion; Rate of substitution; Comparative risk aversion; Multiplicative risk; Risk premium; Probability premium; Paying for risk reductions (search for similar items in EconPapers)
Date: 2024-06-27
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Published in Journées Internationales du Risque, Iriaf, Université de Poitiers, Jun 2024, Niort, France

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04703437

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