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Increasing Outer Risk

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Abstract

Recent empirical research has established that the distributions of a wide range of economic variables are kurtotic in that they have higher peak(s) in the neighborhood of the mean and greater elongation in the tails than the normal distribution. This paper provides a formal characterization of the empirically significant notions of kurtotic distributions by formulating the concept of outer risk. An increase in outer risk corresponds to a dispersion transfer from the center of a distribution to its tails. In terms of the relocation of probability mass, such a dispersion transfer accentuates the peak(s) of the distribution and elongates its tails. It is shown that ordering distributions by outer risk is equivalent to the ordering of distributions resulting from unanimous choice by all individuals whose utility function has a negative fourth derivative.

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File URL: http://economics.missouri.edu/working-papers/2004/wp0413_menezes_wang.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0413.

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Length: 19 pgs.
Date of creation: 23 Dec 2004
Date of revision: 23 Dec 2004
Handle: RePEc:umc:wpaper:0413

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Keywords: Outer risk; outer risk aversion;

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