Variance stochastic orders

No 17-828, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Suppose that the decision-maker is uncertain about the variance of the payoff of a gamble, and that this uncertainty comes from not knowing the number of zero-mean i.i.d. risks attached to the gamble. In this context, we show that any n-th degree increase in this variance risk reduces expected utility if and only if the sign of the 2n-th derivative of the utility function u is (-1)n+1. Moreover, increasing the statistical concordance between the mean payoff of the gamble and the n-th degree riskiness of its variance reduces expected utility if and only if the sign of the 2n + 1 derivative of u is (-1)n+1. These results generalize the theory of risk apportionment developed by Eeckhoudt and Schlesinger (2006), and is useful to better understand the impact of stochastic volatility on welfare and asset prices.

Keywords: Long-run risk; stochastic dominance; prudence; temperance; stochastic volatility; risk apportionment (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Journal Article: Variance stochastic orders (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:31818

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