Conniffe, Denis and O'Neill, Donal (2012) An Alternative Explanation for the Variation in Reported Estimates of Risk Aversion. IZA Discussion Paper No. 6877. Discussion Paper. IZA (Institute for the Study of Labor), Bonn.

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Abstract

There is a large literature estimating Arrow-Pratt coefficients of absolute and relative risk aversion. A striking feature of this literature is the very wide variation in the reported estimates of the coefficients. While there are often legitimate reasons for these differences in the estimates, there is another source of variation that has not been considered to date. The Arrow-Pratt coefficients are properties of the utility functions, but a number of estimates are obtained by equating these to risk aversion measures defined in a mean-variance framework. This paper shows that while the legitimacy of the mean-variance approach may hold under general conditions the additional assumptions invoked when estimating the risk aversion parameter hold only in very restricted circumstances and that serious under or over estimation can easily arise as a result.

Item Type:	Monograph (Discussion Paper)
Additional Information:	The substantive analysis in this paper was carried out by Denis Conniffe before he passed away in January 2011. He was a remarkable man and a wonderful colleague and will be sadly missed by all those who knew him. At Denis’s request, Donal O’Neill agreed to complete this paper and prepare it for submission. We are grateful to Tom Flavin and an anonymous referee for comments on an earlier draft of this paper.
Keywords:	variability; risk aversion estimation; mean-variance estimation; location scale;
Academic Unit:	Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	4340
Depositing User:	Donal O'Neill
Date Deposited:	07 May 2013 15:26
Publisher:	IZA (Institute for the Study of Labor)
URI:	http://www.iza.org
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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