RISK AND PROBABILITY PREMIUMS FOR CARA UTILITY FUNCTIONS Report as inadecuate




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The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

Subject(s): Risk and Uncertainty

Issue Date: 1993-07

Publication Type: Journal Article

PURL Identifier: http://purl.umn.edu/30810 Published in: Journal of Agricultural and Resource Economics, Volume 18, Number 1 Page range: 17-24

Total Pages: 8

Record appears in: Western Agricultural Economics Association > Journal of Agricultural and Resource Economics





Author: Babcock, Bruce A. ; Choi, E. Kwan ; Feinerman, Eli

Source: http://ageconsearch.umn.edu/record/30810?ln=en



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