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Increasing outer risk

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Listed author(s):
  • Menezes, Carmen F.
  • Wang, X.Henry

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.

(This abstract was borrowed from another version of this item.)

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 41 (2005)
Issue (Month): 7 (November)
Pages: 875-886

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Handle: RePEc:eee:mateco:v:41:y:2005:i:7:p:875-886
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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Find related papers by JEL classification:
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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