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Economic and Financial Decisions under Risk - Louis Eeckhoudt

Economic and Financial Decisions under Risk

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Published: 23rd January 2005
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An understanding of risk and how to deal with it is an essential part of modern economics. Whether liability litigation for pharmaceutical firms or an individual's having insufficient wealth to retire, risk is something that can be recognized, quantified, analyzed, treated--and incorporated into our decision-making processes. This book represents a concise summary of basic multiperiod decision-making under risk. Its detailed coverage of a broad range of topics is ideally suited for use in advanced undergraduate and introductory graduate courses either as a self-contained text, or the introductory chapters combined with a selection of later chapters can represent core reading in courses on macroeconomics, insurance, portfolio choice, or asset pricing.

The authors start with the fundamentals of risk measurement and risk aversion. They then apply these concepts to insurance decisions and portfolio choice in a one-period model. After examining these decisions in their one-period setting, they devote most of the book to a multiperiod context, which adds the long-term perspective most risk management analyses require. Each chapter concludes with a discussion of the relevant literature and a set of problems.

The book presents a thoroughly accessible introduction to risk, bridging the gap between the traditionally separate economics and finance literatures.

Winner of the 2007 Kulp-Wright Book Award, American Risk and Insurance Association "This delightful little book is aimed at advanced undergraduate and first year graduate students who need to learn about modeling risk... It contains deep and insightful discussions about all the topics under consideration."--Tapen Sinha, Journal of Risk and Insurance

Prefacep. ix
Decision Theoryp. 1
Risk Aversionp. 3
An Historical Perspective on Risk Aversionp. 3
Definition and Characterization of Risk Aversionp. 7
Risk Premium and Certainty Equivalentp. 9
Degree of Risk Aversionp. 13
Decreasing Absolute Risk Aversion and Prudencep. 16
Relative Risk Aversionp. 17
Some Classical Utility Functionsp. 19
Bibliographical References, Extensions and Exercisesp. 22
The Measures of Riskp. 27
Increases in Riskp. 28
Aversion to Downside Riskp. 36
First-Degree Stochastic Dominancep. 37
Bibliographical References, Extensions and Exercisesp. 39
Risk Managementp. 43
Insurance Decisionsp. 45
Optimal Insurance: an Illustrationp. 47
Optimal Coinsurancep. 49
Comparative Statics in the Coinsurance Problemp. 53
The Optimality of Deductible Insurancep. 56
Bibliographical References, Extensions and Exercisesp. 59
Static Portfolio Choicesp. 65
The One-Risky-One-Riskfree-Asset Modelp. 65
The Effect of Background Riskp. 68
Portfolios of Risky Assetsp. 70
Bibliographical References, Extensions and Exercisesp. 74
Static Portfolio Choices in an Arrow-Debreu Economyp. 77
Arrow-Debreu Securities and Arbitrage Pricingp. 78
Optimal Portfolios of Arrow-Debreu Securitiesp. 80
A Simple Graphical Illustrationp. 83
Bibliographical References, Extensions and Exercisesp. 85
Consumption and Savingp. 89
Consumption and Saving under Certaintyp. 89
Uncertainty and Precautionary Savingsp. 95
Risky Savings and Precautionary Demandp. 98
Time Consistencyp. 99
Bibliographical References, Extensions and Exercisesp. 101
Dynamic Portfolio Managementp. 107
Backward Inductionp. 108
The Dynamic Investment Problemp. 109
Time Diversificationp. 113
Portfolio Management with Predictable Returnsp. 114
Learning about the Distribution of Excess Returnsp. 117
Bibliographical References, Extensions and Exercisesp. 119
Risk and Informationp. 123
The Value of Informationp. 123
Comparative Statics Analysisp. 130
The Hirshleifer Effectp. 134
Bibliographical References, Extensions and Exercisesp. 136
Optimal Preventionp. 141
Prevention under Risk Neutralityp. 142
Risk Aversion and Optimal Preventionp. 142
Prudence and Optimal Preventionp. 144
Bibliographical References, Extensions and Exercisesp. 145
Risk Sharingp. 151
Efficient Allocations of Risksp. 153
Risk Sharing: an Illustrationp. 153
Description of the Economy and Definitionp. 155
Characterization of Efficient Allocations of Riskp. 157
Aggregation of Preferencesp. 163
Bibliographical References, Extensions and Exercisesp. 165
Asset Pricingp. 169
Competitive Markets for Arrow-Debreu Securitiesp. 169
The First Theorem of Welfare Economicsp. 170
The Equity Premiump. 172
The Capital Asset-Pricing Modelp. 175
Two-Fund Separation Theoremp. 177
Bond Pricingp. 179
Bibliographical References, Extensions and Exercisesp. 184
Extensionsp. 189
Asymmetric Informationp. 191
Adverse Selectionp. 192
Moral Hazardp. 199
The Principal-Agent Problemp. 203
Bibliographical References, Extensions and Exercisesp. 209
Alternative Decision Criteriap. 213
The Independence Axiom and the Allais Paradoxp. 215
Rank-Dependent EUp. 217
Ambiguity Aversionp. 221
Prospect Theory and Loss Aversionp. 224
Some Concluding Thoughtsp. 226
Bibliographical References, Extensions and Exercisesp. 227
Indexp. 231
Table of Contents provided by Publisher. All Rights Reserved.

ISBN: 9780691122151
ISBN-10: 0691122156
Audience: Tertiary; University or College
Format: Paperback
Language: English
Number Of Pages: 248
Published: 23rd January 2005
Publisher: Princeton University Press
Country of Publication: US
Dimensions (cm): 23.7 x 15.7  x 1.7
Weight (kg): 0.38