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Orderings and Probability Functionals Consistent with Preferences

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  • Sergio Ortobelli
  • Svetlozar Rachev
  • Haim Shalit
  • Frank Fabozzi

Abstract

This paper unifies the classical theory of stochastic dominance and investor preferences with the recent literature on risk measures applied to the choice problem faced by investors. First, we summarize the main stochastic dominance rules used in the finance literature. Then we discuss the connection with the theory of integral stochastic orders and we introduce orderings consistent with investors' preferences. Thus, we classify them, distinguishing several categories of orderings associated with different classes of investors. Finally, we show how we can use risk measures and orderings consistent with some preferences to determine the investors' optimal choices.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 16 (2009)
Issue (Month): 1 ()
Pages: 81-102

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Handle: RePEc:taf:apmtfi:v:16:y:2009:i:1:p:81-102

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Related research

Keywords: G11; C44; C61;

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References

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  1. Svetlozar Rachev & Sergio Ortobelli & Stoyan Stoyanov & Frank J. Fabozzi & Almira Biglova, 2008. "Desirable Properties Of An Ideal Risk Measure In Portfolio Theory," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 19-54.
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  13. Baucells Alibés Manel & Heukamp Franz H., 2007. "Stochastic Dominance and Cumulative Prospect Theory," Working Papers 201061, Fundacion BBVA / BBVA Foundation.
  14. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
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