Dual utilities on risk aggregation under dependence uncertainty

Ruodu Wang (), Zuo Quan Xu () and Xun Yu Zhou ()
Additional contact information
Ruodu Wang: University of Waterloo
Zuo Quan Xu: The Hong Kong Polytechnic University
Xun Yu Zhou: Columbia University

Finance and Stochastics, 2019, vol. 23, issue 4, No 8, 1025-1048

Abstract: Abstract Finding the worst-case value of a preference over a set of plausible models is a well-established approach to address the issue of model uncertainty or ambiguity. In this paper, we study the worst-case evaluation of Yaari dual utility functionals of an aggregate risk under dependence uncertainty along with its decision-theoretic implications. To arrive at our main findings, we introduce a technical notion of conditional joint mixability. Lower and upper bounds on dual utilities with dependence uncertainty are established, and in the presence of conditional joint mixability, they are shown to be exact bounds. Moreover, conditional joint mixability is indeed necessary for attaining these exact bounds when the distortion functions are strictly inverse-S-shaped. A particular economic implication of our results is what we call the pessimism effect. We show that a (generally non-convex/non-concave) dual utility-based decision maker under dependence uncertainty behaves as if she had a risk-averse dual utility which is more pessimistic but free of dependence uncertainty.

Keywords: Dual utility; Conditional joint mixability; Risk aggregation; Dependence uncertainty; Pessimism effect; 91B16; 60E15 (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-019-00399-y Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:23:y:2019:i:4:d:10.1007_s00780-019-00399-y

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-019-00399-y

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().