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Increasing Risk: Some Direct Constructions

Mark Machina () and John W Pratt

Journal of Risk and Uncertainty, 1997, vol. 14, issue 2, 103-27

Abstract: This article extends the classic Rothschild-Stiglitz characterization of comparative risk ("increasing risk") in two directions. By adopting a more general definition of "mean preserving spread" (MPS), it provides a direct construction of a sequence of MPS's linking any pair of distributions that are ranked in terms of comparative risk. It also provides a direct, explicit construction of a zero-conditional-mean "noise" variable for any such pair of distributions. Both results are extended to the case of second order stochastic dominance. Copyright 1997 by Kluwer Academic Publishers

Date: 1997
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