Market behavior when preferences are generated by second-order stochastic dominance
We develop a theory of decision making and General Equilibrium for contingent markets when incomplete preferences are generated by second-order stochastic dominance (SSD). Demand, Pareto-optima and equilibria dominance are fully characterized. Demands and equilibrium allocations are non-increasing functions of the pricing density and Pareto-optimal allocations are comonotone. They generalize mean–variance demands and CAPM equilibrium allocations which are non-increasing affine functions of the pricing density. They are not observationally distinguishable from those of von-Neumann–Morgenstern decision makers with increasing strictly concave utilities nor from those of strict risk averse non-expected utility maximizers. We also show that expenditure functions associated to second-order stochastic dominance, provide microeconomic foundations for a class of law invariant risk-measures used in mathematical finance.
|Date of creation:||2004|
|Date of revision:|
|Publication status:||Published in Journal of Mathematical Economics, 2004, Vol. 40, no. 6. pp. 619-639.Length: 20 pages|
|Contact details of provider:|| Web page: http://www.dauphine.fr/en/welcome.html|
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