Catastrophe Aversion and Risk Equity in an Interdependent World

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.

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Reference

Carole Bernard, Christoph Rheinberger, and Nicolas Treich, “Catastrophe Aversion and Risk Equity in an Interdependent World”, IDEI Working Paper, n. 872, May 2017.