Bivariate Stochastic Dominance and Substitute Risk-(In)dependent Utilities

Michel Denuit () and Louis Eeckhoudt
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Michel Denuit: Institut de Statistique, Biostatistique et Sciences Actuarielles, Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium

Decision Analysis, 2010, vol. 7, issue 3, 302-312

Abstract: In this paper, we show that, despite their rigid analytical form, substitute risk-independent utilities have a much wider applicability than expected. Our contribution extends that of Mosler (Mosler, K. C. 1984. Stochastic dominance decision rules when the attributes are utility independent. Management Sci. 30 (11) 1311--1322) by considering utility functions that exhibit properties beyond nonsatiation and risk aversion (e.g., prudence and temperance). By using the widespread idea of correlation aversion, substitute risk-independent utilities are shown to generate bivariate stochastic dominance. As an application, portfolios are compared to assess the possible hedging effect between two outcomes.

Keywords: bivariate (s1; s2)-increasing concave orders; bivariate stochastic dominance; conditional risk aversion; portfolios (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (7)

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http://dx.doi.org/10.1287/deca.1100.0179 (application/pdf)

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Working Paper: Bivariate stochastic dominance and substitute risk-(in)dependent utilities (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ordeca:v:7:y:2010:i:3:p:302-312

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