An Alternative Explanation for the Variation in Reported Estimates of Risk Aversion

Denis Conniffe and Donal O'Neill

No 6877, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: There is a large literature estimating Arrow-Pratt coefficients of absolute and relative risk aversion. A striking feature of this literature is the very wide variation in the reported estimates of the coefficients. While there are often legitimate reasons for these differences in the estimates, there is another source of variation that has not been considered to date. The Arrow-Pratt coefficients are properties of the utility functions, but a number of estimates are obtained by equating these to risk aversion measures defined in a mean-variance framework. This paper shows that while the legitimacy of the mean-variance approach may hold under general conditions the additional assumptions invoked when estimating the risk aversion parameter hold only in very restricted circumstances and that serious under or over estimation can easily arise as a result.

Keywords: location scale; mean-variance estimation; variability in risk aversion estimation (search for similar items in EconPapers)
JEL-codes: C91 D81 G11 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2012-09
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

Published - published in: Journal of Risk, 2013, 15 (4), 91-102

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