A new characterization of second-order stochastic dominance

We provide a new characterization of second-order stochastic dominance, also known as increasing concave order. The result has an intuitive interpretation that adding a risk with negative expected value in adverse scenarios makes the resulting position generally less desirable for risk-averse agents. A similar characterization is also found for convex order and increasing convex order. The proof techniques for the main result are based on properties of Expected Shortfall, a family of risk measures that is popular in banking and insurance regulation. Applications in risk management and insurance are discussed.

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Publication Details

Journal
Insurance Mathematics and Economics
Published
2024-10-11
DOI
https://doi.org/10.1016/j.insmatheco.2024.09.005
Primary Topic
Risk and Portfolio Optimization
Type
article
Field-Weighted Citation Impact
0.00

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article

A new characterization of second-order stochastic dominance

Ruodu Wang, Muqiao Huang, Yuanying Guan
Insurance Mathematics and Economics
Risk and Portfolio Optimization
article

A new characterization of second-order stochastic dominance

Ruodu Wang, Muqiao Huang, Yuanying Guan
article en

Abstract

We provide a new characterization of second-order stochastic dominance, also known as increasing concave order. The result has an intuitive interpretation that adding a risk with negative expected value in adverse scenarios makes the resulting position generally less desirable for risk-averse agents. A similar characterization is also found for convex order and increasing convex order. The proof techniques for the main result are based on properties of Expected Shortfall, a family of risk measures that is popular in banking and insurance regulation. Applications in risk management and insurance are discussed.

Insurance Mathematics and EconomicsVol. 119
University of Waterloo (CA), Japan Real Estate Institute (JP), Actua (CA)
Canada Research Chairs, Natural Sciences and Engineering Research Council of Canada
Decent work and economic growth
Openalex Percentile: Top 79%
Risk and Portfolio Optimization
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