Higher-order risk vulnerability

Huang, Xiaoping and Stapleton, Richard Christopher (2017) Higher-order risk vulnerability. Economic Theory, 63 (2). pp. 387-406. ISSN 0938-2259

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We add an independent unfair background risk to higher-order risk-taking models in the current literature and examine its interaction with the main risk under consideration. Parallel to the well-known concept of risk vulnerability, which is defined by Gollier and Pratt (Econometrica 64:1109–1123, 1996), an agent is said to have a type of higher-order risk vulnerability if adding an independent unfair background risk to wealth raises his level of this type of higher-order risk aversion. We derive necessary and sufficient conditions for all types of higher-order risk vulnerabilities and explain their behavioral implications. We find that as in the case of risk vulnerability, all familiar HARA utility functions have all types of higher-order risk vulnerabilities except for a type of third-order risk vulnerability corresponding to a downside risk aversion measure called the Schwarzian derivative.

Item Type:
Journal Article
Journal or Publication Title:
Economic Theory
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The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-015-0935-2
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Deposited On:
22 Apr 2016 07:56
Last Modified:
22 Nov 2022 03:08