Modeling non-monotone risk aversion using SAHARA utility functions

• 成果类型: Article
• 署名作者: Chen, An; Pelsser, Antoon; Vellekoop, Michel
• 署名单位: University of Bonn; Maastricht University; University of Amsterdam
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2011.06.011
• 发表日期: 2011
• 页码: 2075-2092
• 关键词: SAHARA utility; Optimal investment problem; Dual approach; Utility indifference pricing

摘要

We develop a new class of utility functions, SAHARA utility, with the distinguishing feature that it allows absolute risk aversion to be non-monotone and implements the assumption that agents may become less risk averse for very low values of wealth. The class contains the well-known exponential and power utility functions as limiting cases. We investigate the optimal investment problem under SAHARA utility and derive the optimal strategies in an explicit form using dual optimization methods. We also show how SAHARA utility functions extend the class of contingent claims that can be valued using indifference pricing in incomplete markets. (C) 2011 Elsevier Inc. All rights reserved.