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arXiv · 2402.13355

A new characterization of second-order stochastic dominance

Yuanying Guan·Muqiao Huang·Ruodu Wang
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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.

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Yuanying Guan, Muqiao Huang, Ruodu Wang. 2024-02-20. A new characterization of second-order stochastic dominance. https://arxiv.org/abs/2402.13355

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