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Bivariate Stochastic Dominance and Substitute Risk-(In)dependent Utilities

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  • Michel Denuit

    (Institut de Statistique, Biostatistique et Sciences Actuarielles, Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

  • Louis Eeckhoudt

    (IÉSEG School of Management, Université Catholique de Lille, 59000 Lille, France; and Center for Operations Research and Econometrics, Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

In this paper, we show that, despite their rigid analytical form, substitute risk-independent utilities have a much wider applicability than expected. Our contribution extends that of Mosler (Mosler, K. C. 1984. Stochastic dominance decision rules when the attributes are utility independent. Management Sci. 30 (11) 1311--1322) by considering utility functions that exhibit properties beyond nonsatiation and risk aversion (e.g., prudence and temperance). By using the widespread idea of correlation aversion, substitute risk-independent utilities are shown to generate bivariate stochastic dominance. As an application, portfolios are compared to assess the possible hedging effect between two outcomes.

Suggested Citation

  • Michel Denuit & Louis Eeckhoudt, 2010. "Bivariate Stochastic Dominance and Substitute Risk-(In)dependent Utilities," Decision Analysis, INFORMS, vol. 7(3), pages 302-312, September.
    • Handle: RePEc:inm:ordeca:v:7:y:2010:i:3:p:302-312
    DOI: 10.1287/deca.1100.0179
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    Cited by:

    1. Denuit, Michel & Rey, Beatrice, 2012. "Uni- And Multidimensional Risk Attitudes: Some Unifying Theorems," LIDAM Discussion Papers ISBA 2012014, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    2. Dionne, Georges & Li, Jingyuan, 2014. "Comparative Ross risk aversion in the presence of mean dependent risks," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 128-135.
    3. Denuit, Michel & Rey, Béatrice, 2013. "Another look at risk apportionment," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 335-343.
    4. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART 14-01, INRAE UMR SMART.
    5. Argyris, Nikolaos & French, Simon, 2017. "Nuclear emergency decision support: A behavioural OR perspective," European Journal of Operational Research, Elsevier, vol. 262(1), pages 180-193.
    6. L. Robin Keller, 2010. "From the Editor..," Decision Analysis, INFORMS, vol. 7(3), pages 235-237, September.
    7. Denuit, Michel M. & Mesfioui, Mhamed, 2017. "Preserving the Rothschild–Stiglitz type increase in risk with background risk: A characterization," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 1-5.
    8. Kenneth C. Lichtendahl & Raul O. Chao & Samuel E. Bodily, 2012. "Habit Formation from Correlation Aversion," Operations Research, INFORMS, vol. 60(3), pages 625-637, June.
    9. L. Robin Keller, 2011. "From the Editor ---Multiattribute and Intertemporal Preferences, Probability, and Stochastic Processes: Models and Assessment," Decision Analysis, INFORMS, vol. 8(3), pages 165-169, September.
    10. Georges Dionne & Jingyuan Li, 2012. "Comparative Ross Risk Aversion in the Presence of Quadrant Dependent Risks," Cahiers de recherche 1226, CIRPEE.

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