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On the Risk–Downside Risk Tradeoff

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  • Carmen F. Menezes
  • X. Henry Wang

Abstract

In the last decade the literature has established the empirical importance of the tradeoff between risk and downside risk in a variety of economic settings. While the notions of risk and downside risk have been generalized in the theoretical literature, the literature has yet to provide a choice‐theoretic characterization of their tradeoff. This paper provides an analytical characterization of the risk–downside risk tradeoff and shows its relevance in the analysis of optimal decisions under uncertainty, such as the precautionary savings decision.

Suggested Citation

  • Carmen F. Menezes & X. Henry Wang, 2004. "On the Risk–Downside Risk Tradeoff," Manchester School, University of Manchester, vol. 72(2), pages 179-187, March.
    • Handle: RePEc:bla:manchs:v:72:y:2004:i:2:p:179-187
    DOI: 10.1111/j.1467-9957.2004.00387.x
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    References listed on IDEAS

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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Pownall, Rachel A. J. & Koedijk, Kees G., 1999. "Capturing downside risk in financial markets: the case of the Asian Crisis," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 853-870, December.
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    10. Menezes, Carmen F & Auten, Gerald E, 1978. "The Theory of Optimal Saving Decisions under Income Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(1), pages 253-258, February.
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    Cited by:

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