A new characterization of second-order stochastic dominance

Yuanying Guan, Muqiao Huang and Ruodu Wang

Insurance: Mathematics and Economics, 2024, vol. 119, issue C, 261-267

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.

Keywords: Expected Shortfall; Stochastic dominance; Convex order; Dependence; Strassen's theorem (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:119:y:2024:i:c:p:261-267

DOI: 10.1016/j.insmatheco.2024.09.005

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