Working paper
Catastrophe Aversion and Risk Equity in an Interdependent World
Carole Bernard, Christoph Rheinberger, and Nicolas Treich
n. 872, May 2017
Reference
Carole Bernard, Christoph Rheinberger, and Nicolas Treich, “Catastrophe Aversion and Risk Equity in an Interdependent World”, IDEI Working Paper, n. 872, May 2017.
Abstract
Catastrophe aversion and risk equity are important concepts both in risk management theory and practice. Ralph Keeney (1980) was the first to formally define these concepts. He demonstrated that the two concepts are always in con ict. Yet his result is based on the assumption that individual risks are independent. It has therefore limited relevance for real-world catastrophic events. We extend Keeney's result to dependent risks and derive the conditions under which more equity and more correlation between two risks imply a more catastrophic situation. We then generalize some of the results for multiple correlated risks.
Keywords
risk equity; catastrophe aversion; correlation; dependence structure;
Research partnership
Risk Attitude