Decreasing downside risk aversion and background risk

Crainich, David;Eeckhoudt, Louis;Le Courtois, Olivier
(2014) Journal of Mathematical Economics — Vol. 53, p. 59-63 (2014)

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  • Crainich, DavidIéseg School of Management
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  • Eeckhoudt, LouisIéseg School of Management
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  • Le Courtois, OlivierEM Lyon Business School
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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 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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Crainich, D., Eeckhoudt, L., & Le Courtois, O. (2014). Decreasing downside risk aversion and background risk. Journal of Mathematical Economics, 53, 59-63. https://doi.org/10.1016/j.jmateco.2014.05.009 (Original work published 2014)