Spectral risk measures and the choice of risk aversion functior

Kevin Dowd and John Cotter

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

Abstract: Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their risk-aversion functions. To date there has been very little guidance on the choice of risk-aversion functions underlying spectral risk measures. This paper addresses this issue by examining two popular risk aversion functions, based on exponential and power utility functions respectively. We find that the former yields spectral risk measures with nice intuitiveproperties, but the latter yields spectral risk measures that can have perverse properties. More work therefore needs to be done before we can be sure that arbitrary but respectable utility functions will always yield ‘well-behaved’ spectral risk measures.

Keywords: Coherent risk measures; spectral risk measures; Risk aversion functions; Risk--Econometric models; International finance; Financial risk (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Date: 2007-03
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http://hdl.handle.net/10197/1188 First version, 2007 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1188

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