Higher-Order Risk Attitudes toward Correlation

Citation data:

SSRN Electronic Journal

Publication Year:
2013
Usage 527
Abstract Views 478
Downloads 49
Repository URL:
http://commons.ln.edu.hk/sw_master/2728; https://works.bepress.com/jingyuanli/14
SSRN Id:
2270995
DOI:
10.2139/ssrn.2270995
Author(s):
LI, Jingyuan
Publisher(s):
Elsevier BV
Tags:
higher-order risk attitudes; stochastic dominance dependence; correlation; covariance; Economics
article description
Higher-order risk attitudes other than risk aversion (e.g., prudence and temperance) play vital roles both in theoretical and empirical work. While the literature has mainly focused on how they entail a preference for combining “good” outcomes with “bad” outcomes, we consider here an alternative approach which relates higher-order risk attitudes to the sign of correlation. The theoretical result in this paper proposes new insights into economic and financial applications such as risk aversion in the presence of another risk, bivariate stochastic dominance and justifying the first-order approach to moral hazard principal-agent problems.