Beneficial changes in dependence structures and two-moment decision models

: We analyze the comparative static effects of beneficial changes in the dependence structure between risks. In an insurance model with an insurable loss and dependent background wealth, a mean-variance decision maker will take higher risks upon an increase in the coefficient of correlation of the risks if, and only if, the risk elasticity of risk aversion is larger than -0.5. For the case of elliptical distributions, a higher coefficient of correlation means precendence in the concordance order, and the elasticity condition is equivalent to the index of relative prudence being smaller than one. JEL classification: D 81

• Type: Journal
• Year: 2010
• Where: ORL
• Authors: Thomas Eichner, Andreas Wagener
• Keywords: Comparative Static Effects, Dependent Background Wealth, Operations Research, ORL 2010, Risks