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Insurance demand and first order risk increases under (l, r)-preferences

ISI: Insurance demand and first order risk increases under (l, r)-preferences

CLAUDIO BONILLA M., JOSE RUIZ V.

2014 - Journal of Finance Research Letters - Vol. 11, Nº 3, Pp 219 - 223

Abstract

 We study the optimal insurance demand in the ð Þ l;r space when the decision-maker faces a first-order risk increase. In particular, we investigate the effect of an increase in the expected damage when the variance is held constant. An unambiguous result is derived on insurance demand that differs from previous results in the literature in that it does not depend on additional assumption such as DARA utility functions or the level of risk aversion elasticity location and scale condition requiring that the distributions of the random variables belong to theRisk aversion is an old-established concept that originated in the field of mathematics almost three centuries ago with the early writings of Bernoulli (1954). It was Pratt, however, who popularized it among economists in his classic article (Pratt, 1964) by formalizing and extending notions of risk aversion within an expected utility framework, the usual paradigm used in economics and finance. The connection between the expected utility model based on the Von Newman Morgenstein utility functions and the ð Þ l;r analysis has developed rapidly since the seminal contributions of Sinn (1983) and Meyer (1987), which stated the conditions under which both approaches are equivalent. The location and scale condition requiring that the distributions of the random variables belong to the

Keywords

Insurance demand, risk increase, risk aversion, DARA preferences.

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