Lecture34-2004 - Lecture XXXIV Constant Relative and...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Lecture XXXIV Constant Relative and Absolute Risk Aversion and Derivation of the State Contingent Dual Functions I. Constant Relative and Absolute Risk Aversion A. Risk Premium: 1. Based on the definition of risk aversion from the preceding lecture, Chambers and Quiggin define the Risk Premium as the amount that a risk averse decision maker is willing to sacrifice to obtain a certain payoff. 45 0 Fair-Odds Line A 2 y 1 y 1 2 π y * y 2. In this graph y is an outcome from a state-contingent output combination , however given risk aversion, the decision maker is indifferent between the state-contingent output combination * y and y . Note that * y is a certain payoff because it is on the 45 0 line. a. The certainty equivalent is the distance between point y and point * y in state-space. b. Analytically, the absolute risk premium is defined by the benefit function: () ( ) () { } max : 1 ,1 ry cW y c Wy BW y y =− = 3. The relative risk premium is then defined by the distance function:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
AEB 6182–Agricultural Risk Analysis and Decision Making Lecture 34
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/15/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

Page1 / 4

Lecture34-2004 - Lecture XXXIV Constant Relative and...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online