Risk measurement with the equivalent utility principles

Risk measures have been studied for several decades in the actuarial literature, where they appeared under the guise of premium calculation principles. Risk measures and properties that risk measures should satisfy have recently received considerable at- tention in the financial mathematics literature. Mathematically, a risk measure is a mapping from a class of random variables defined on some measurable space to the (extended) real line. Economically, a risk measure should capture the preferences of the decision-maker. In incomplete financial markets, prices are no more unique but depend on the agents' attitudes towards risk. This paper complements the study initiated in Denuit, Dhaene & Van Wouwe (1999) and considers several theories for decision under uncertainty: the classical expected utility paradigm, Yaari's dual approach, maximin expected utility theory, Choquet expected utility theory and Quiggin rank-dependent utility theory. Building on the actuarial equivalent utility pricing principle, broad classes of risk measures are generated, of which most classical risk measures appear to be particular cases. This approach shows that most risk measures studied recently in the financial literature disregard the utility concept (i.e. correspond to linear utilities), causing some deficiencies. Some alternatives proposed in the literature are discussed, based on exponential utilities.status: publishe