Risk and Probability Premiums for CARA Utility Functions

Bruce Babcock, Eun Choi and Eli Feinerman

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk-aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and ,49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

Date: 1993-07-01
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Citations: View citations in EconPapers (95)

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Related works:
Journal Article: RISK AND PROBABILITY PREMIUMS FOR CARA UTILITY FUNCTIONS (1993)
Working Paper: Risk and Probability Premiums for Cara Utility Function (1993)
Working Paper: Risk and Probability Premiums for CARA Utility Functions (1993)
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