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Measuring Risk Substitution Rates for Additive and Multiplicative Risk Increases

Author

Listed:
  • Christoph Heinzel

    (SMART - Structures et Marché Agricoles, Ressources et Territoires - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Rennes Angers - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement, INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

Risk substitution rates gauge the willingness to substitute lower- for higher-order risk increases and admit comparisons of the preferences that determine how risk impacts utility derivatives (Heinzel 2023). Despite their intuitive and theoretical appeal, measuring risk substitution rates is not obvious. This paper shows that extensions of the choice-based generalized risk-aversion measures in Liu and Neilson (2019) provide different complementary ways to quantify risk substitution rates. The analysis also holds for multiplicative risk increases. The results point to various new choice-based approaches to assess comparative higher-order Ross risk aversion.

Suggested Citation

  • Christoph Heinzel, 2024. "Measuring Risk Substitution Rates for Additive and Multiplicative Risk Increases," Post-Print hal-04850979, HAL.
    • Handle: RePEc:hal:journl:hal-04850979
    as

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