Stochastic Dominance And Conditional Expectation - An Insurance Theoretical Approach
Author
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.
Department/s
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