How risky is a random process?

Sudhir A. Shah

Journal of Mathematical Economics, 2017, vol. 72, issue C, 70-81

Abstract: The riskiness of random processes is compared by (a) employing a decision theoretic equivalence between processes and lotteries on path-spaces to identify the riskiness of the former with that of the latter, and (b) using the theory of comparative riskiness of lotteries over vector spaces to compare the riskiness of lotteries on a given path-space. We derive the equivalence used in step (a) and contribute a new criterion to the theory applied in step (b). The validity of the new criterion, which applies second order stochastic dominance to utility distributions, is established by showing its equivalence to the benchmark decision theoretic criterion when comparing the riskiness of lotteries over any vector space. We demonstrate the theory’s tractability via diverse economic applications.

Keywords: Random processes; Vector outcomes; Comparative riskiness; Utility-based second order stochastic dominance; Monotone comparative statics (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:72:y:2017:i:c:p:70-81

DOI: 10.1016/j.jmateco.2017.06.005

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