A new characterization of second-order stochastic dominance
Risk Management
2024-09-30 v3
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.
Keywords
Cite
@article{arxiv.2402.13355,
title = {A new characterization of second-order stochastic dominance},
author = {Yuanying Guan and Muqiao Huang and Ruodu Wang},
journal= {arXiv preprint arXiv:2402.13355},
year = {2024}
}