Paper Info
Title
Risk measures based on behavioural economics theory.
Abstract
Coherent risk measures (Artzner et al. in Math. Finance 9:203–228, 1999) and convex risk measures (Föllmer and Schied in Finance Stoch. 6:429–447, 2002) are characterized by desired axioms for risk measures. However, concrete or practical risk measures could be proposed from different perspectives. In this paper, we propose new risk measures based on behavioural economics theory. We use rank-dependent expected utility (RDEU) theory to formulate an objective function and propose the smallest solution that minimizes the objective function as a risk measure. We also employ cumulative prospect theory (CPT) to introduce a set of acceptable regulatory capitals and define the infimum of the set as a risk measure. We show that the classes of risk measures derived from RDEU theory and CPT are equivalent, and they are all monetary risk measures. We present the properties of the proposed risk measures and give sufficient and necessary conditions for them to be coherent and convex, respectively. The risk measures based on these behavioural economics theories not only cover important risk measures such as distortion risk measures, expectiles and shortfall risk measures, but also produce new interesting coherent risk measures and convex, but not coherent risk measures.
Year
DOI
Venue
2018
10.1007/s00780-018-0358-6
Finance and Stochastics
Keywords
Field
DocType
Distortion risk measure, Expectile, Coherent risk measure, Convex risk measure, Monetary risk measure, Stop-loss order preserving, Rank-dependent expected utility theory, Cumulative prospect theory, 91B16, 91B30, 91G99, C60, G10, D81
Coherent risk measure,Econometrics,Economics,Mathematical optimization,Expected utility hypothesis,Axiom,Infimum and supremum,Distortion risk measure,Cumulative prospect theory,Risk measure
Journal
Volume
Issue
ISSN
22
2
0949-2984
Citations 
PageRank 
References 
0
0.34
2
Authors
2
Name
Order
Citations
PageRank
Tiantian Mao102.03
Jun Cai237339.29