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Stochastic Dominance And Conditional Expectation - An Insurance Theoretical Approach

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Author

  • Anders Borglin
  • Hans Keiding

Summary, in English

We show that the relation of second order stochastic dominance, which has found widespread use in models of economic behavior under uncertainty, may be described in terms of conditional expectation. If a distribution G second order stochastically dominates another distribution F, then there are random variables g and f with distributions G and F, respectively, such that g can be obtained from f by iterated conditional expectation. In terms of insurance, this shows that the less risky distribution can be obtained by a sequence of insurance contracts each one insuring against the residual risk left over from the previous contracts.

Publishing year

2002

Language

English

Pages

31-48

Publication/Series

The Geneva Papers on Risk and Insurance Theory

Volume

27

Issue

1

Document type

Journal article

Publisher

Kluwer Academic Publishers

Topic

  • Economics

Keywords

  • stochastic dominance
  • conditional expectation
  • Lorenz domination
  • reversed martingale

Status

Published

ISBN/ISSN/Other

  • ISSN: 0926-4957