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.
Authors
- Ruodu Wang (ORCID: https://orcid.org/0000-0003-3849-4555)
- Muqiao Huang
- Yuanying Guan
Institutions
- University of Waterloo (CA)
- Japan Real Estate Institute (JP)
- Actua (CA)
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
Funders
- Canada Research Chairs
- Natural Sciences and Engineering Research Council of Canada