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How Risky Is A Random Process?

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  • Sudhir A. Shah

    (Centre for Development Economics, Delhi School of Economics, University of Delhi, India)

Abstract

The riskiness of random processes is compared by (a) employing a decision-theoretic equivalence between processes and lotteries on path- spaces to identify the riskiness of the former with that of the latter, and (b) using the theory of comparative riskiness of lotteries over vector spaces to compare the riskiness of lotteries on a given path-space. We derive the equivalence used in step (a) and contribute a new criterion to the theory applied in step (b). The new criterion, involving a gener- alized form of second order stochastic dominance, is shown to be valid by establishing its equivalence to the standard decision-theoretic crite- rion. We demonstrate its tractability via diverse economic applications featuring risk embodied in random processes.

Suggested Citation

  • Sudhir A. Shah, 2016. "How Risky Is A Random Process?," Working papers 252, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:252
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    2. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
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