In this paper we examine the effect of stochastic volatility on optimal portfolio choice in both partial and general equilibrium settings. In a partial equilibrium setting we derive an analog of the classic Samuelson–Merton optimal portfolio result and define volatility-adjusted risk aversion as the effective risk aversion of an individual investing in an asset with stochastic volatility. We ex...

This article discusses the determination of risk capital based on “aversion” functions. Aversion functions weigh different outcomes according to perceived severity. Many practical and popular risk measures are usefully viewed in terms of aversion functions including those arising from distortion operators and risk margin loadings. The approach of this paper builds on, unifies,and extends existi...

This paper defines local aversion to a risk index. I show that the local aversion to the Aumann and Serrano [2008] index of riskiness coincides with absolute risk aversion, and that the same applies for the Foster and Hart [2009] measure of riskiness. Using this “local consistency” I offer a new approach for axiomatizing the Aumann and Serrano index of riskiness and present other applications o...

Using data on Uruguayan adolescents, we estimate peer effects in risk attitudes. Relative risk aversion is elicited in an experimental setting. Identification is based on parents not being able to choose the class within the school of their choice. After controlling for school-grade fixed effect and addressing endogeneity due to simultaneity, we find a significant and quantitative large impact ...

This paper reports the results of a detailed investigation of the risk-averse and loss-averse behaviour of UK individual investors. An one-period analytical model of investing behaviour is developed to explore the differences between individuals who are risk averse, and those whose behaviour is better described by Kahneman & Tversky’s Prospect Theory. Questionnaire data on risk perceptions is u...