Stochastic orders of scalar products with applications

Lei Hua and Ka Chun Cheung

Insurance: Mathematics and Economics, 2008, vol. 42, issue 3, 865-872

Abstract: In this paper, we study stochastic orders of scalar products of random vectors. Based on the study of Ma [Ma, C., 2000. Convex orders for linear combinations of random variables. J. Statist. Plann. Inference 84, 11-25], we first obtain more general conditions under which linear combinations of random variables can be ordered in the increasing convex order. As an application of this result, we consider the scalar product of two random vectors which separates the severity effect and the frequency effect in the study of the optimal allocation of policy limits and deductibles. Finally, we obtain the ordering of the optimal allocation of policy limits and deductibles when the dependence structure of the losses is unknown. This application is a further study of Cheung [Cheung, K.C., 2007. Optimal allocation of policy limits and deductibles. Insurance: Math. Econom. 41, 382-391].

Date: 2008
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