Nonparametric risk management and implied risk aversion

Nonparametric Risk Management and Implied Risk Aversion

Nonparametric comparative revealed risk aversion

We introduce a nonparametric method to compare risk aversion of dišerent investors based on revealed preference methods. Using Yaari’s (1969) denition of “more risk averse than”, we show that it is su›cient to compare the revealed preference relations of two investors. is makes the approach operational; the central rationalisability theorem provides strong support for this approach. e approach...

Why does Implied Risk Aversion smile?

A few recent papers have derived estimates of the representative agent's risk aversion by comparing the statistical density of asset returns and the state-price density. The implied risk aversion estimates obtained in these studies are puzzling, exhibiting (i) pronounced U-shaped patterns (a smile ) and (ii) negative values. This paper analyzes three potential explanations for these phenomena: ...

Implied Risk Aversion in Lottery Bond Prices♦

Both the equity premium puzzle and the credit spread puzzle address the problem of a reasonable size of agents’ risk aversion. The empirical estimation of risk aversion parameters is impeded by the fact that observed prices depend on risk preferences and probability beliefs. The market for German redemption lottery bonds constitutes a clean environment to estimate risk aversion coefficients fro...

Risk Aversion in Inventory Management

Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing str...