Gollier, Christian (2017) Variance stochastic orders. TSE Working Paper, n. 17-828, Toulouse

There is a more recent version of this item available.

Preview

Text Download (667kB) | Preview

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.

Available Versions of this Item

• Variance stochastic orders. (deposited 14 Mar 2018 13:44) [Currently Displayed]
  • Variance stochastic orders. (deposited 19 Nov 2018 11:10)