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On a Stochastic Model of Diversification

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  • Maria Logvaneva
  • Mikhail Tselishchev

Abstract

We propose a definition of diversification as a binary relationship between financial portfolios. According to it, a convex linear combination of several risk positions with some weights is considered to be less risky than the probabilistic mixture of the same risk positions with the same weights. It turns out to be that the proposed partial ordering coincides with the well-known second order stochastic dominance, but allows to take a look at it from another perspective.

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  • Maria Logvaneva & Mikhail Tselishchev, 2022. "On a Stochastic Model of Diversification," Papers 2204.01284, arXiv.org.
    • Handle: RePEc:arx:papers:2204.01284
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    References listed on IDEAS

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    1. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    2. Ruodu Wang & Yunran Wei & Gordon E. Willmot, 2020. "Characterization, Robustness, and Aggregation of Signed Choquet Integrals," Mathematics of Operations Research, INFORMS, vol. 45(3), pages 993-1015, August.
    3. Carlo Acerbi & Dirk Tasche, 2002. "Expected Shortfall: A Natural Coherent Alternative to Value at Risk," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(2), pages 379-388, July.
    4. Mikhail Tselishchev, 2019. "On the Concavity of Expected Shortfall," Papers 1910.00640, arXiv.org.
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