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CRETA Workshop on Risk Theory 03 - 27 December 2013, Kuan Te Lecture Hall, 2F, Bldg. 1, College of Management, NTU
CRETA is honored to invite Professor W. Henry Chiu from University of Manchester as a visitor from Dec. 25-Dec. 28. During his visit, Prof. Chiu will give a lecture on Correlation-Increasing Marginal Risk Increases and Financial Risk Taking in the Presence of Non-Financial Background Risks on CRETA Workshop on Risk Theory 03. The workshop is due to take place on Dec. 27 (Friday) at Kuan Te Lecture Hall, 2F, Bldg. 1, College of Management, NTU (臺大管理學院一號館 2 樓冠德講堂). All participants are welcomed! Please be sure to register your attendance online by noon, Dec. 20 (Friday).
* Date : December 27 (Friday), 2013, 1:30pm – 5:20pm
* Venue: Kuan Te Lecture Hall, 2F, Bldg. 1, College of Management, NTU (臺大管院一號館 2 樓冠德講堂)
* Topic: Correlation-Increasing Marginal Risk Increases and Financial Risk Taking in the Presence of Non-
Financial Background Risks
(當天將開放現場繳交臺灣經濟計量學會 2014 年年度會費)
Economic decision making under uncertainty often takes place in settings where choices about endogenous risks must be made while simultaneously facing one or more exogenous background risks that are not under the control of the decision maker and that can potentially be correlated with the endogenous risks. While considerable effort has been devoted to characterizing in the Expected Utility (EU) framework the conditions on the utility function under which changes in financial background risks that are independent of the endogenous risk have a definitive effect on risk aversion, existing results on how non-financial background risks (such as health) affect financial risk taking are limited in scope and generality. In particular, the prominent literature on multivariate stochastic dominance notwithstanding, little is known about the characteristics of the overall risk change induced by taking a financial risk in the presence of potentially correlated non-financial background risks. As a result, there has been no characterization of a decision maker's attitudes towards such risk changes that determine her optimal economic decisions.
In this lecture, we show that taking a zero-mean financial risk in the presence of a non-financial risk that is correlated with the financial risk in the sense of positive expectation dependence induces a bivariate stochastic deterioration, which we term “correlation-increasing marginal risk increase”. As well as identifying the necessary and sufficient condition on the distributions for such a stochastic deterioration, we show that it can always be decomposed into an increase in correlation and a marginal mean-preserving spread, and is disliked by all EU maximizers who are correlation-averse and marginal risk averse (i.e., with a utility function concave in wealth). We further characterize a measure of aversion to correlation-increasing marginal risk increase and the concept of decreasing aversion to correlation-increasing marginal risk increase and demonstrate their behavioral implications in the contexts of insurance purchasing and portfolio selection.
Professor Chiu is currently Senior Lecturer of Economics at University of Manchester and also an Associate Editor of Management Science. Professor Chiu’s research interests focus on the Risk Theory and Risk Management. His research articles have been published in several prestigious journals, such as Management Science and Journal of Political Economy.
December 27 (Friday,2013, Kuan Te Lecture Hall, 2F (二樓冠德講堂)
15:30-15:50: coffee Break
15:50-17:20: Students’ Presentation
a. Christine Wang, “Efficient Diversification under Almost Stochastic Dominance”
b. Yi-Chieh Huang, “Comparative Ambiguity Aversion and Downside Ambiguity Aversion”
c. Eugene Huang, “Managerial Motivation When Effort Improves Higher Order Risk”