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Increases in risk aversion and the distribution of portfolio payoffs


  • Dybvig, Philip H.
  • Wang, Yajun


Oliver Hart proved the impossibility of deriving general comparative static properties in portfolio weights. Instead, we derive new comparative statics for the distribution of payoffs: A is less risk averse than B iff Aʼs payoff is always distributed as Bʼs payoff plus a non-negative random variable plus conditional-mean-zero noise. If either agent has nonincreasing absolute risk aversion, the non-negative part can be chosen to be constant. The main result also holds in some incomplete markets with two assets or two-fund separation, and in multiple periods for a mixture of payoff distributions over time (but not at every point in time).

Suggested Citation

  • Dybvig, Philip H. & Wang, Yajun, 2012. "Increases in risk aversion and the distribution of portfolio payoffs," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1222-1246.
  • Handle: RePEc:eee:jetheo:v:147:y:2012:i:3:p:1222-1246 DOI: 10.1016/j.jet.2011.11.009

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    References listed on IDEAS

    1. Rothschild, Michael & Stiglitz, Joseph E., 1972. "Addendum to "increasing risk: I. A definition"," Journal of Economic Theory, Elsevier, vol. 5(2), pages 306-306, October.
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    Cited by:

    1. Dejian Tian & Weidong Tian, 2016. "Comparative statics under κ-ambiguity for log-Brownian asset prices," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(4), pages 361-378, December.
    2. Bernard, Carole & Chen, Jit Seng & Vanduffel, Steven, 2015. "Rationalizing investors’ choices," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 10-23.

    More about this item


    Risk aversion; Portfolio theory; Stochastic dominance; Complete markets; Two-fund separation;

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions


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