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Multiple Risks and Mean-Variance Preferences

Author

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  • Thomas Eichner

    (Department of Economics, University of Bielefeld, 33615 Bielefeld, Germany)

  • Andreas Wagener

    (Institute of Social Policy, University of Hannover, 30167 Hannover, Germany)

Abstract

We analyze comparative static effects under uncertainty when a decision maker has mean-variance preferences and faces a generic, quasi-linear decision problem with both an endogenous risk and a background risk. In terms of mean-variance preferences, we fully characterize the effects of changes in the location, scale, and concordance parameters of the stochastic environment on optimal risk taking. Presupposing compatibility between the mean-variance and the expected-utility approach, we then translate these mean-variance properties into their analogues for von Neumann-Morgenstern utility functions.

Suggested Citation

  • Thomas Eichner & Andreas Wagener, 2009. "Multiple Risks and Mean-Variance Preferences," Operations Research, INFORMS, vol. 57(5), pages 1142-1154, October.
    • Handle: RePEc:inm:oropre:v:57:y:2009:i:5:p:1142-1154
    DOI: 10.1287/opre.1090.0692
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    Cited by:

    1. Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "Two-moment decision model for location-scale family with background asset," MPRA Paper 43864, University Library of Munich, Germany.
    2. Huang, Xiaoxia & Yang, Tingting, 2020. "How does background risk affect portfolio choice: An analysis based on uncertain mean-variance model with background risk," Journal of Banking & Finance, Elsevier, vol. 111(C).
    3. Alghalith, Moawia, 2012. "The impact of background risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6506-6508.
    4. Moawia Alghalith & Xu Guo & Cuizhen Niu & Wing-Keung Wong, 2017. "Input Demand Under Joint Energy and Output Prices Uncertainties," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(04), pages 1-12, August.
    5. Michel Denuit & Louis Eeckhoudt & Mario Menegatti, 2011. "Correlated risks, bivariate utility and optimal choices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 39-54, January.
    6. Matthias Pelster, 2015. "Marketable and non-hedgeable risk in a duopoly framework with hedging," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(4), pages 697-716, October.
    7. Udo Broll & Soumyatanu Mukherjee, 2018. "The attitude of multinationals towards risks," Discussion Papers 2018-02, University of Nottingham, GEP.
    8. Xu Guo & Raymond H. Chan & Wing-Keung Wong & Lixing Zhu, 2019. "Mean–variance, mean–VaR, and mean–CVaR models for portfolio selection with background risk," Risk Management, Palgrave Macmillan, vol. 21(2), pages 73-98, June.
    9. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll & Mamata Parhi, 2021. "Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 752-773, May.
    10. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll, 2019. "Export investment under uncertainty: a mean-variance decision analysis for Indian manufacturing exporters," Discussion Papers 2019-18, University of Nottingham, GEP.
    11. Xiaoxia Huang & Guowei Jiang, 2021. "Portfolio management with background risk under uncertain mean-variance utility," Fuzzy Optimization and Decision Making, Springer, vol. 20(3), pages 315-330, September.
    12. Soumyatanu Mukherjee & Sidhartha S Padhi, 2018. "Risk connectivity and risk mitigation: An analytical framework," Discussion Papers 2018-11, University of Nottingham, CREDIT.
    13. Ho, Shirley J. & Chang, Hung-Wei, 2022. "Impacts of sharing business on production, sales, and rental markets," International Journal of Production Economics, Elsevier, vol. 248(C).
    14. Yuchen Li & Zongxia Liang & Shunzhi Pang, 2022. "Continuous-Time Monotone Mean-Variance Portfolio Selection in Jump-Diffusion Model," Papers 2211.12168, arXiv.org, revised May 2024.
    15. Vergara, Marcos & Bonilla, Claudio A., 2021. "Precautionary saving in mean-variance models and different sources of risk," Economic Modelling, Elsevier, vol. 98(C), pages 280-289.
    16. Thomas Eichner & Andreas Wagener, 2011. "Portfolio allocation and asset demand with mean-variance preferences," Theory and Decision, Springer, vol. 70(2), pages 179-193, February.
    17. Padhi, Sidhartha S. & Mukherjee, Soumyatanu & Edwin Cheng, T.C., 2024. "Optimal investment decision for industry 4.0 under uncertainties of capability and competence building for managing supply chain risks," International Journal of Production Economics, Elsevier, vol. 267(C).
    18. Alghalith, Moawia & Niu, Cuizhen & Wong, Wing-Keung, 2017. "The impacts of joint energy and output prices uncertainties in a mean-variance framework," MPRA Paper 79739, University Library of Munich, Germany.
    19. Soumyatanu Mukherjee & Sidhartha S. Padhi, 2022. "Sourcing decision under interconnected risks: an application of mean–variance preferences approach," Annals of Operations Research, Springer, vol. 313(2), pages 1243-1268, June.
    20. Xu Guo & Andreas Wagener & Wing-Keung Wong & Lixing Zhu, 2018. "The two-moment decision model with additive risks," Risk Management, Palgrave Macmillan, vol. 20(1), pages 77-94, February.
    21. Huang, Chenchen & Luo, Di & Mukherjee, Soumyatanu & Mishra, Tapas, 2022. "To Acquire or to Ally? Managing Partners’ Environmental Risk in International Expansion," MPRA Paper 117591, University Library of Munich, Germany, revised 07 Jan 2023.
    22. Eichner, Thomas, 2011. "Portfolio selection and duality under mean variance preferences," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 146-152, January.
    23. Jim Y. Jin & Shinji Kobayashi, 2016. "Impact of risk aversion and countervailing tax in oligopoly," Annals of Finance, Springer, vol. 12(3), pages 393-408, December.
    24. Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "An analysis of portfolio selection with multiplicative background risk," MPRA Paper 51331, University Library of Munich, Germany.

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