Consistent measures of risk

Jon Danielsson, Jean-Pierre Zigrand, Bjørn Jørgensen, Mandira Sarma and Casper de Vries

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper we compare overall as well as downside risk measures with respect to the criteria of first and second order stochastic dominance. While the downside risk measures, with the exception of tail conditional expectation, are consistent with first order stochastic dominance, overall risk measures are not, even if we restrict ourselves to two-parameter distributions. Most common risk measures preserve consistent preference orderings between prospects under the second order stochastic dominance rule, although for some of the downside risk measures such consistency holds deep enough in the tail only. In fact, the partial order induced by many risk measures is equivalent to sosd. Tail conditional expectation is not consistent with respect to second order stochastic dominance.

Keywords: stochastic dominance; risk measures; preference ordering; utility theory (search for similar items in EconPapers)
JEL-codes: D81 G00 G11 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2006-05-25
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://eprints.lse.ac.uk/24517/ Open access version. (application/pdf)

Related works:
Working Paper: Consistent Measures of Risk (2006)
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