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    • University of Missouri-Columbia
    • College of Arts and Sciences (MU)
    • Department of Economics (MU)
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    The Precautionary Premium and the Risk-Downside Risk Tradeoff

    Menezes, Carmen F.
    Wang, X. H. (X. Henry), 1962-
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    [PDF] PrecautionaryPremium.pdf (63.65Kb)
    Date
    2002
    Format
    Working Paper
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    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
    Part of
    Working papers (Department of Economics);WP 02-04
    Part of
    Economics publications
    Citation
    Department of Economics, 2002
    Collections
    • Economics publications (MU)

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