Article

Catastrophe Aversion and Risk Equity in an Interdependent World

Carole Bernard, Christoph Rheinberger, and Nicolas Treich

Abstract

Catastrophe aversion and risk equity are important concepts in both risk management theory and practice. Keeney (1980) was the first to formally define these concepts. He demonstrated that the two concepts are always in conflict. Yet this result is based on the assumption that individual risks are independent and has thus limited relevance for real world catastrophic events. We extend Keeney’s result to dependent risks and derive the conditions under which more correlation between two risks induces a more catastrophic risk. We then generalize some of the results for multiple correlated risks.

Keywords

risk equity; catastrophe aversion; correlation; dependence;

Replaces

Carole Bernard, Christoph Rheinberger, and Nicolas Treich, Catastrophe Aversion and Risk Equity in an Interdependent World, TSE Working Paper, n. 17-811, May 2017.

Published in

Management Science, 2017, forthcoming