Stochastic Dominance and Absolute Risk Aversion
UPF Economics and Business Working Paper No. 643
27 Pages Posted: 19 Jun 2003
Date Written: July 23, 2002
Abstract
In this paper we propose the infimum of the Arrow-Pratt index of absolute risk aversion as a measure of global risk aversion of a utility function. We then show that, for any given arbitrary pair of distributions, there exists a threshold level of global risk aversion such that all increasing concave utility functions with at least as much global risk aversion would rank the two distributions in the same way. Furthermore, this threshold level is sharp in the sense that, for any lower level of global risk aversion, we can find two utility functions in this class yielding opposite preference relations for the two distributions.
Keywords: Risk aversion, stochastic dominance
JEL Classification: D81, D30
Suggested Citation: Suggested Citation