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Increases in risk aversion and the distribution of portfolio payoffs

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  • Dybvig, Philip H.
  • Wang, Yajun

Abstract

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

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    Cited by:

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    5. Bernard, Carole & Chen, Jit Seng & Vanduffel, Steven, 2015. "Rationalizing investors’ choices," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 10-23.

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    More about this item

    Keywords

    Risk aversion; Portfolio theory; Stochastic dominance; Complete markets; Two-fund separation;
    All these keywords.

    JEL classification:

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

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