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Almost Expectation and Excess Dependence Notions

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  • Denuit, Michel
  • Huang, Rachel
  • Tzeng, Larry

Abstract

This paper weakens the expectation dependence concept due to Wright (Theory Decis 22:111–124, 1987 ) and its higher-order extensions proposed by Li (J Econ Theory 146:372–391, 2011 ) to conform with the preferences generating the almost stochastic dominance rules introduced in Leshno and Levy (Manag Sci 48:1074–1085, 2002 ). A new dependence concept, called excess dependence is introduced and studied in addition to expectation dependence. This new concept coincides with expectation dependence at first-degree but provides distinct higher-order extensions. Three applications, to portfolio diversification, to the determination of the sign of the equity premium in the consumption-based CAPM, and to optimal investment in the presence of a background risk, illustrate the usefulness of the approach proposed in the present paper. Copyright Springer Science+Business Media New York 2015
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Suggested Citation

  • Denuit, Michel & Huang, Rachel & Tzeng, Larry, 2013. "Almost Expectation and Excess Dependence Notions," LIDAM Discussion Papers ISBA 2013005, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvad:2013005
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    Cited by:

    1. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    2. Georges Dionne & Jingyuan Li & Cédric Okou, 2024. "An alternative representation of the C-CAPM with higher-order risks," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(2), pages 194-233, September.
    3. Denuit, Michel M. & Mesfioui, Mhamed, 2017. "Preserving the Rothschild–Stiglitz type increase in risk with background risk: A characterization," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 1-5.
    4. He, Junnan & Tang, Qihe & Zhang, Huan, 2016. "Risk reducers in convex order," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 80-88.
    5. Yi-Chieh Huang & Kamhon Kan & Larry Y. Tzeng & Kili C. Wang, 2021. "Estimating the Critical Parameter in Almost Stochastic Dominance from Insurance Deductibles," Management Science, INFORMS, vol. 67(8), pages 4742-4755, August.
    6. Li, Jingyuan & Liu, Dongri & Wang, Jianli, 2016. "Risk aversion with two risks: A theoretical extension," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 100-105.
    7. Michel Denuit & Louis Eeckhoudt, 2016. "Risk aversion, prudence, and asset allocation: a review and some new developments," Theory and Decision, Springer, vol. 80(2), pages 227-243, February.
    8. Guo, Xu & Li, Jingyuan, 2016. "Confidence band for expectation dependence with applications," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 141-149.
    9. Xuehu Zhu & Xu Guo & Lu Lin & Lixing Zhu, 2016. "Testing for positive expectation dependence," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 68(1), pages 135-153, February.

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