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A new characterization of second-order stochastic dominance

Author

Listed:
  • Guan, Yuanying
  • Huang, Muqiao
  • Wang, Ruodu

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.

Suggested Citation

  • Guan, Yuanying & Huang, Muqiao & Wang, Ruodu, 2024. "A new characterization of second-order stochastic dominance," Insurance: Mathematics and Economics, Elsevier, vol. 119(C), pages 261-267.
    • Handle: RePEc:eee:insuma:v:119:y:2024:i:c:p:261-267
    DOI: 10.1016/j.insmatheco.2024.09.005
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