Increases in risk aversion and the distribution of portfolio payoffs

Philip Dybvig and Yajun Wang

Journal of Economic Theory, 2012, vol. 147, issue 3, 1222-1246

Abstract: Oliver Hart proved the impossibility of deriving general comparative static properties in portfolio weights. Instead, we derive new comparative statics for the distribution of payoffs: A is less risk averse than B iff Aʼs payoff is always distributed as Bʼs payoff plus a non-negative random variable plus conditional-mean-zero noise. If either agent has nonincreasing absolute risk aversion, the non-negative part can be chosen to be constant. The main result also holds in some incomplete markets with two assets or two-fund separation, and in multiple periods for a mixture of payoff distributions over time (but not at every point in time).

Keywords: Risk aversion; Portfolio theory; Stochastic dominance; Complete markets; Two-fund separation (search for similar items in EconPapers)
JEL-codes: D33 G11 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:147:y:2012:i:3:p:1222-1246

DOI: 10.1016/j.jet.2011.11.009

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