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Stochastic Dominance and Conditional Expectation—An Insurance Theoretical Approach

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  • Anders Borglin

    (Economics Department, University of Lund, Ekonomicentrum, Tycho Brakes vag 1, S-22007 Lund, Sweden, e-mail: anders.borglin@nek.iu.se)

  • Hans Keiding

    (Institute of Economics, University of Copenhagen, Studie Straede 6, DK-1456, Copenhagen K, Denmark, e-mail: Hans.Keiding@econ.ku.dk)

Abstract

We show that the relation of second order stochastic dominance, which has found widespread use in models of economic behavior under uncertainty, may be described in terms of conditional expectation. If a distribution G second order stochastically dominates another distribution F, then there are random variables g and f with distributions G and F, respectively, such that g can be obtained from f by iterated conditional expectation. In terms of insurance, this shows that the less risky distribution can be obtained by a sequence of insurance contracts each one insuring against the residual risk left over from the previous contracts. The Geneva Papers on Risk and Insurance Theory (2002) 27, 31–48. doi:10.1023/A:1020629424238

Suggested Citation

  • Anders Borglin & Hans Keiding, 2002. "Stochastic Dominance and Conditional Expectation—An Insurance Theoretical Approach," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 27(1), pages 31-48, June.
    • Handle: RePEc:pal:genrir:v:27:y:2002:i:1:p:31-48
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