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Incremental risk vulnerability

Author

Listed:
  • Franke, Günter
  • Stapleton, Richard C.
  • Subrahmanyam, Marti G.

Abstract

We present a necessary and sufficient condition on an agent's utility function for a simple mean preserving spread in an independent background risk to increase the agent's risk aversion (incremental risk vulnerability). Gollier and Pratt (1996) have shown that declining and convex risk aversion as well as standard risk aversion are sufficient for risk vulnerability. We show that these conditions are also sufficient for incremental risk vulnerability. In addition, we present sufficient conditions for a restricted set of stochastic increases in an independent background risk to increase risk aversion.

Suggested Citation

  • Franke, Günter & Stapleton, Richard C. & Subrahmanyam, Marti G., 2005. "Incremental risk vulnerability," CoFE Discussion Papers 05/08, University of Konstanz, Center of Finance and Econometrics (CoFE).
    • Handle: RePEc:zbw:cofedp:0508
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    References listed on IDEAS

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    1. Donald J. Meyer & Jack Meyer, 1998. "Changes in Background Risk and the Demand for Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 23(1), pages 29-40, June.
    2. Franke, Gunter & Stapleton, Richard C. & Subrahmanyam, Marti G., 1998. "Who Buys and Who Sells Options: The Role of Options in an Economy with Background Risk," Journal of Economic Theory, Elsevier, vol. 82(1), pages 89-109, September.
    3. Donald C. Keenan & Arthur Snow, 2003. "Locally Greater Vulnerability to Background Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(2), pages 161-172, December.
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    Cited by:

    1. Sookhtanlo, Mojtaba & Gholami, Hesamedin & Es’haghi, Seyyed Reza, 2013. "Drought Risk Vulnerability Parameters among Wheat Farmers in Mashhad County, Iran," International Journal of Agricultural Management and Development (IJAMAD), Iranian Association of Agricultural Economics, vol. 3(4), pages 1-10, December.
    2. Malevergne, Y. & Rey, B., 2009. "On cross-risk vulnerability," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 224-229, October.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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