We study the properties of the risk-sensitive value measure and mean-variance approach studied by Hodoshima et al. [2] when the degree of risk aversion is small. We show that the two value measures work similarly in normal mixture distributions as well as any distribution when the degree of risk aversion is small. Therefore, the advantage of the risk-sensitive value measure disappears compared to mean- variance approach in any distribution when the degree of risk aversion is small. We obtain the result by approximating the risk-sensitive value measure by Taylor series expansion.

utility indifference pricing, mean-variance approach, degree of risk aversion, Taylor series approximation.

Received: September 6, 2022; Accepted: October 13, 2022; Published: October 22, 2022

How to cite this article: Jiro Hodoshima, Utility indifference pricing and mean-variance approach when the degree of risk aversion is small, Far East Journal of Theoretical Statistics 66 (2022), 135-146. http://dx.doi.org/10.17654/0972086322016

This Open Access Article is Licensed under Creative Commons Attribution 4.0 International License

References:

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