Decreasing downside risk aversion and background risk |
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| Institution: | 1. CNRS (LEM, UMR 8179), France;2. Iéseg School of Management, 3 rue de la Digue, 59000 Lille, France;3. CORE (Université Catholique de Louvain), 34 voie du Roman Pays, 1348 Louvain-la-Neuve, Belgium;4. EM Lyon Business School, 23 avenue Guy de Collongue, 69134 Ecully Cedex, France;1. School of Finance, Renmin University of China, China;2. Department of Economics, Chinese University of Hong Kong, Shatin, N.T., Hong Kong;1. Departamento de Matemáticas, Universidad de Almería, Spain;2. Department of Applied Mathematics, Computer Science and Statistics, Ghent University, Belgium;3. Departamento de Análisis Matemático, Universidad de Granada, Spain;4. Grupo de Investigación de Análisis Matemático, Universidad de Almería, Spain;1. Department of Economics, University of Cologne, Albertus-Magnus Platz, D-50923 Cologne, Germany;2. Vienna Graduate School of Finance and Institute for Advanced Studies, A-1080 Vienna, Austria;1. Department of Economics and Management, University of Pisa, Italy;2. CNRS, CMAP - Ecole Polytechnique, France;1. Paris School of Economics - University Paris 1, CES, 106 bd de l’Hopital, 75013, Paris, France;2. University of La Rochelle (MIA), Avenue Michel Crepeau, 47042, La Rochelle, France;3. University of Leiden, P.O. Box 9512, 2300 RA Leiden, The Netherlands |
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| Abstract: | In this paper, we show that risk vulnerability can be associated with the concept of downside risk aversion (DRA) and an assumption about its behavior, namely that it is decreasing in wealth. Specifically, decreasing downside risk aversion in the Arrow–Pratt and Ross senses are respectively necessary and sufficient for a zero-mean background risk to raise the aversion to other independent risks. |
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| Keywords: | Downside risk aversion Background risk Risk vulnerability |
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