EXPO-POWER UTILITY - A FLEXIBLE FORM FOR ABSOLUTE AND RELATIVE RISK-AVERSION

A new utility function, which I call expo-power, is proposed that exhibits decreasing, constant, or increasing absolute risk aversion and decreasing or increasing relative risk aversion, depending on parameter values. Numerical analysis suggests that the expo-power function performs well in incorporating these risk preference structures, and that arbitrary risk preference specifications may lead to biased risk response estimates.