Franke, Günter Stapleton, Richard C. Subrahmanyam, Marti G.
Year of Publication:
Discussion paper series // Zentrum für Finanzen und Ökonometrie, Universität Konstanz 2005,08
We present a necessary and sufficient condition on an agent's utility function for a simple mean preserving spread in an independent background risk to increase the agent's risk aversion (incremental risk vulnerability). Gollier and Pratt (1996) have shown that declining and convex risk aversion as well as standard risk aversion are sufficient for risk vulnerability. We show that these conditions are also sufficient for incremental risk vulnerability. In addition, we present sufficient conditions for a restricted set of stochastic increases in an independent background risk to increase risk aversion.