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Risk preference evaluation - a fourth dimension of the application of the Laplace transform
Linköping University, Department of Management and Engineering, Production Economics. Linköping University, Faculty of Science & Engineering. Mediterranean Inst Adv Studies, Slovenia.
2018 (English)In: International Journal of Production Research, ISSN 0020-7543, E-ISSN 1366-588X, Vol. 56, no 1-2, p. 344-373Article in journal (Refereed) Published
Abstract [en]

In this paper, we apply the Laplace transform to risk preference theory (decision theory, decision analysis). We show that with a constant measure of absolute risk aversion, the certainty monetary equivalent (CME) can be developed into an expression involving the logarithm of the bilateral Laplace transform of the probability density of the outcome of risky projects. We also introduce a measure named internal risk aversion (IRA). This is in analogy with the earlier application of the transform to net present value problems. Properties of the CME function are examined. Basic examples of application are introduced followed by applications to portfolio theory and option pricing.

Place, publisher, year, edition, pages
TAYLOR & FRANCIS LTD , 2018. Vol. 56, no 1-2, p. 344-373
Keywords [en]
Risk preference; Laplace transform; risk aversion; certainty monetary equivalent; net present value; utility function; CME; NPV; IRA
National Category
Computer Sciences
Identifiers
URN: urn:nbn:se:liu:diva-147596DOI: 10.1080/00207543.2017.1401248ISI: 000428859200021OAI: oai:DiVA.org:liu-147596DiVA, id: diva2:1201794
Available from: 2018-04-26 Created: 2018-04-26 Last updated: 2018-04-26

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Grubbström, Robert W
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Output format
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