RISK AND PROBABILITY PREMIUMS FOR CARA UTILITY FUNCTIONS

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.


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 created 2017-04-01, last modified 2017-08-24

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