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 o...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Western Agricultural Economics Association
1993-07-01
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| Series: | Journal of Agricultural and Resource Economics |
| Subjects: | |
| Online Access: | https://ageconsearch.umn.edu/record/30810 |
| Summary: | 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. |
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| ISSN: | 1068-5502 2327-8285 |