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Almost expectation and excess dependence notions

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  • Michel Denuit
  • Rachel Huang
  • Larry Tzeng

Abstract

This paper weakens the expectation dependence concept due to Wright (Theory Decis 22:111–124, 1987 ) and its higher-order extensions proposed by Li (J Econ Theory 146:372–391, 2011 ) to conform with the preferences generating the almost stochastic dominance rules introduced in Leshno and Levy (Manag Sci 48:1074–1085, 2002 ). A new dependence concept, called excess dependence is introduced and studied in addition to expectation dependence. This new concept coincides with expectation dependence at first-degree but provides distinct higher-order extensions. Three applications, to portfolio diversification, to the determination of the sign of the equity premium in the consumption-based CAPM, and to optimal investment in the presence of a background risk, illustrate the usefulness of the approach proposed in the present paper. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Michel Denuit & Rachel Huang & Larry Tzeng, 2015. "Almost expectation and excess dependence notions," Theory and Decision, Springer, vol. 79(3), pages 375-401, November.
    • Handle: RePEc:kap:theord:v:79:y:2015:i:3:p:375-401
    DOI: 10.1007/s11238-014-9476-6
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    Cited by:

    1. Li, Jingyuan & Liu, Dongri & Wang, Jianli, 2016. "Risk aversion with two risks: A theoretical extension," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 100-105.
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    3. 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.
    4. Guo, Xu & Li, Jingyuan, 2016. "Confidence band for expectation dependence with applications," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 141-149.
    5. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    6. He, Junnan & Tang, Qihe & Zhang, Huan, 2016. "Risk reducers in convex order," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 80-88.
    7. Yi-Chieh Huang & Kamhon Kan & Larry Y. Tzeng & Kili C. Wang, 2021. "Estimating the Critical Parameter in Almost Stochastic Dominance from Insurance Deductibles," Management Science, INFORMS, vol. 67(8), pages 4742-4755, August.
    8. Xuehu Zhu & Xu Guo & Lu Lin & Lixing Zhu, 2016. "Testing for positive expectation dependence," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 68(1), pages 135-153, February.

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