Archimedean Copulas Derived from Morgenstern Utility Functions

Download or read book Archimedean Copulas Derived from Morgenstern Utility Functions written by Jaap Spreeuw and published by . This book was released on 2013 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: The (additive) generator of an Archimedean copula - as well as the inverse of the generator - is a strictly decreasing and convex function, while Morgenstern utility functions (applying to risk averse decision makers) are nondecreasing and concave. This provides a basis for deriving either a generator of Archimedean copulas, or its inverse, from a Morgenstern utility function. If we derive the generator itself in this way, dependence properties of an Archimedean copula that are often taken to be desirable, match with generally sought after properties of the corresponding utility function. If, on the other hand, we instead derive the inverse of the generator from the utility function, there is a link between the magnitude of measures of risk attitude (like the very common Arrow-Pratt coefficient of absolute risk aversion) and the strength of dependence featured by the corresponding Archimedean copula. For both methods some new copula families are derived, and their properties are discussed.