A new characterization of second-order stochastic dominance

Yuanying Guan, Muqiao Huang and Ruodu Wang

Papers from arXiv.org

Abstract: We provide a new characterization of second-order stochastic dominance, also known as increasing concave order. The result has an intuitive interpretation that adding a risk with negative expected value in adverse scenarios makes the resulting position generally less desirable for risk-averse agents. A similar characterization is also found for convex order and increasing convex order. The proof techniques for the main result are based on properties of Expected Shortfall, a family of risk measures that is popular in banking and insurance regulation. Applications in risk management and insurance are discussed.

Date: 2024-02, Revised 2024-09
New Economics Papers: this item is included in nep-upt
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