Total and partial Bivariate Risk Premia: An Extension

Theory and Decision 55 (1):59-69 (2003)
Abstract
This paper investigates the link between the total bivariate risk premium and the sum of partial bivariate risk premia. Whereas in the case of small risks, the non interaction between risks is a sufficient condition to obtain the equality between the total risk premium and the sum of partial risk premia, the paper shows that this condition is not sufficient for large risks. The non interaction between risks occurs in two cases: if risks are independent or if individual's marginal utility of one good is independent of the endowment in the other. Without restriction on the utility function, none of these two conditions is sufficient for large risks. If attention is restricted to preferences that exhibit constant absolute risk aversion, the non variability of the marginal utility of good one with respect to variations in endowment in the other remains a sufficient condition, while the independence between risks does not
Keywords bivariate risk premium  correlated risks  cross derivatives  multivariate risk aversion  partial bivariate risk premium
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