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Benchmark values for higher order coefficients of relative risk aversion

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Abstract

The existing literature on savings, insurance, and portfolio choices under risk has revealed that quite often comparative statics results depend, among other things, upon the values of the coefficients of relative risk aversion and relative prudence. More specifically the benchmark values for these coefficients are, respectively, one and two. Recently, several papers investigated constraints on the higher degree extensions of the coefficients of relative risk aversion and of relative prudence. The present work provides a unified approach to this question based on the concept of elementary correlation increasing transformations, allowing for a better understanding of changes in risk in the multiplicative case.

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Acknowledgments

The authors would like to express their gratitude to anonymous referees and an associate editor whose comments have been extremely useful to revise a previous version of the present work. The financial support of PARC “Stochastic Modelling of Dependence” 2012–2017 awarded by the Communauté française de Belgique is gratefully acknowledged by Michel Denuit.

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Authors and Affiliations

  1. Institut de Statistique, Biostatistique et Sciences Actuarielles (ISBA), Université Catholique de Louvain, Louvain-la-Neuve, Belgium

    Michel Denuit

  2. Laboratoire SAF, ISFA, Université de Lyon, Université Lyon 1, Lyon, France

    Béatrice Rey

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  1. Michel Denuit
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  2. Béatrice Rey
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Correspondence to Michel Denuit.

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Denuit, M., Rey, B. Benchmark values for higher order coefficients of relative risk aversion. Theory Decis 76, 81–94 (2014). https://doi.org/10.1007/s11238-013-9353-8

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  • DOI: https://doi.org/10.1007/s11238-013-9353-8

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