The Precautionary Premium and the Risk-Downside Risk Tradeoff

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The Precautionary Premium and the Risk-Downside Risk Tradeoff

Please use this identifier to cite or link to this item: http://hdl.handle.net/10355/2731

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Title: The Precautionary Premium and the Risk-Downside Risk Tradeoff
Author: Menezes, Carmen F.; Wang, X. H. (X. Henry), 1962-
Keywords: risk
downside risk
wealth
Date: 2002
Publisher: Department of Economics
Citation: Department of Economics, 2002
Series/Report no.: Working papers (Department of Economics);WP 02-04
Abstract: This paper shows that the precautionary premium embodies a tradeoff between risk and downside risk. It is the size of a mean-preserving spread for thish the strength of aversion to risk just offsets the strength of aversion to downside risk. Using this result, decreasing absolute prudence can be interpreted as meaning that the amount of exposure to risk (as measured by a spread) for which aversion to risk just offsets aversion to downside risk decreases as wealth increases. This happens when an increase in wealth causes a smaller percentage change in absolute downside risk aversion than in absolute risk aversion.
URI: http://hdl.handle.net/10355/2731

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  • Economics publications (MU) [120]
    The items in this collection are the scholarly output of the faculty, staff, and students of the Department of Economics.

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