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A stochastic order for the analysis of investments affected by the time value of money

Author

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  • López-Díaz, María Concepción
  • López-Díaz, Miguel
  • Martínez-Fernández, Sergio

Abstract

Time value of money reads that an amount of money at the present time is worth more than the same amount in future because its earning capacity and inflation. This fact is reflected in multiple financial concepts and in the final result of numerous investments by means of functions which satisfy appropriate properties. Motivated by the need to compare such investments we introduce an integral stochastic order generated by those functions. The maximal generator of the order is obtained. It is proved that the new stochastic order is generated by a non-stochastic partial order and the class of preserving mappings of such a partial order. Characterizations of the order are developed. Relevant properties, as well as connections with other stochastic orderings and examples, are studied.

Suggested Citation

  • López-Díaz, María Concepción & López-Díaz, Miguel & Martínez-Fernández, Sergio, 2018. "A stochastic order for the analysis of investments affected by the time value of money," Insurance: Mathematics and Economics, Elsevier, vol. 83(C), pages 75-82.
    • Handle: RePEc:eee:insuma:v:83:y:2018:i:c:p:75-82
    DOI: 10.1016/j.insmatheco.2018.08.001
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    References listed on IDEAS

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    1. De Schepper, Ann & Goovaerts, Marc & Dhaene, Jan & Kaas, Rob & Vyncke, David, 2002. "Bounds for present value functions with stochastic interest rates and stochastic volatility," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 87-103, August.
    2. M V Tretyakov, 2013. "Introductory Course on Financial Mathematics," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number p889, February.
    3. Marco Scarsini, 1986. "Comparison of random cash flows," Post-Print hal-00542252, HAL.
    4. Dhaene, Jan & Goovaerts, Marc & Vanmaele, Michèle & Van Weert, Koen, 2012. "Convex order approximations in the case of cash flows of mixed signs," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 249-256.
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    More about this item

    Keywords

    Cash flow; Maximal generator; Stochastic order; Time value of money; Preserving mapping;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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