Risk Aversion in the Small and in the Large under Rank-Dependent Utility

TL;DR

This paper extends the concept of risk aversion analysis from expected utility to rank-dependent utility and Yaari's dual theory, providing new insights into risk preferences under these models.

Contribution

It demonstrates that similar risk aversion concepts and their applications can be developed within rank-dependent utility and dual theory frameworks.

Findings

Risk aversion concepts are applicable beyond expected utility.

The paper establishes links between local risk measures and global risk premia in new models.

Provides a unified approach to risk analysis across different utility theories.

Abstract

Under expected utility the local index of absolute risk aversion has played a central role in many applications. Besides, its link with the "global" concepts of the risk and probability premia has reinforced its attractiveness. This paper shows that, with an appropriate approach, similar developments can be achieved in the framework of Yaari's dual theory and, more generally, under rank-dependent utility.