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On the intensity of downside risk aversion

Authors:

Institution:

(1) CNRS/LEM (UMR 8179) and IESEG School of Management, Catholic University of Lille, Lille, France;(2) IESEG School of Management (LEM), Lille, France;(3) CORE, Catholic University of Louvain, Louvain, Belgium

Abstract:

The degree of downside risk aversion (or equivalently prudence) is so far usually measured by $\frac{-U^{\prime \prime \prime }}{U^{\prime \prime }}$ . We propose here another measure, $\frac{U^{\prime \prime \prime }}{U^{\prime }}$ , which has specific and interesting local and global properties. Some of these properties are to a wide extent similar to those of the classical measure of absolute risk aversion, which is not always the case for $\frac{ -U^{\prime \prime \prime }}{U^{\prime \prime }}$ . It also appears that the two measures are not mutually exclusive. Instead, they seem to be rather complementary as shown through an economic application dealing with a simple general equilibrium model of savings.

David CrainichEmail:

Keywords:

Downside risk aversion Measure Intensity

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