Journal article
Precautionary risk-reduction and saving decisions: Two sides of the same coin?
Insurance, mathematics & economics, Vol.118, pp.175-194
09/2024
DOI: 10.1016/j.insmatheco.2024.07.001
Abstract
We provide new results about the comparative static effects of income risk and interest rate risk on optimal risk-reduction and saving decisions. We combine arguments from the risk apportionment literature with monotone comparative statics. Risk reduction and saving are Edgeworth-Pareto substitutes for (mixed) risk averters and Edgeworth-Pareto complements for (mixed) risk lovers. For changes in income risk, risk reduction and saving are Nth-degree risk complements for risk lovers. For changes in interest rate risk, risk reduction and saving are Nth-degree risk substitutes for risk averters. The individual's risk attitude and the source of risk thus co-determine the effects of risk changes on optimal. We also discuss several extensions including multiple loss states, higher-order risk reduction, stochastic dominance, non-separable utility, and inflation risk.
•Higher-order risk effects on risk-reduction and saving decisions.•Edgeworth-Pareto substitutes (complements) for risk averters (lovers).•Changes in income risk and interest rate risk.•Monotone comparative statics and risk apportionment.•Nth-degree risk complements or substitutes.
Details
- Title: Subtitle
- Precautionary risk-reduction and saving decisions: Two sides of the same coin?
- Creators
- Richard Peter - University of Iowa, Henry B. Tippie College of Business, Department of Finance, United States of AmericaAnnette Hofmann - University of Cincinnati
- Resource Type
- Journal article
- Publication Details
- Insurance, mathematics & economics, Vol.118, pp.175-194
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.insmatheco.2024.07.001
- ISSN
- 0167-6687
- eISSN
- 1873-5959
- Language
- English
- Date published
- 09/2024
- Academic Unit
- Economics; Finance
- Record Identifier
- 9984657357802771
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