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Article
Risk and Probability Premiums for CARA Utility Functions
Journal of Agricultural and Resource Economics
  • Bruce A. Babcock, Iowa State University
  • E. Kwan Choi, Iowa State University
  • Eli Feinerman, Hebrew University of Jerusalem
Document Type
Article
Publication Version
Published Version
Publication Date
1-1-1993
Abstract
The risk premium and the probability premium are used to determine appro- priate coefficients of absolute risk aversion under CARA utility. A defensible range of risk-aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.
Comments

This is an article from Journal of Agricultural and Resource Economics 18 (1993): 17. Posted with permission.

Copyright Owner
Western Agricultural Economics Association
Language
en
File Format
application/pdf
Citation Information
Bruce A. Babcock, E. Kwan Choi and Eli Feinerman. "Risk and Probability Premiums for CARA Utility Functions" Journal of Agricultural and Resource Economics Vol. 18 Iss. 1 (1993) p. 17 - 24
Available at: http://works.bepress.com/ekwan-choi/15/