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Increasing Outer Risk

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.

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File URL: https://economics.missouri.edu/working-papers/2004/wp0413_menezes_wang.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0413.

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Length: 19 pgs.
Date of creation: 23 Dec 2004
Date of revision: 23 Dec 2004
Handle: RePEc:umc:wpaper:0413
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  1. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
  2. Hwang, Soosung & Satchell, Stephen E, 1999. "Modelling Emerging Market Risk Premia Using Higher Moments," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(4), pages 271-96, October.
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  4. Richard Harris & C. Coskun Kucukozmen, 2001. "The empirical distribution of stock returns: evidence from an emerging European market," Applied Economics Letters, Taylor & Francis Journals, vol. 8(6), pages 367-371.
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  7. Corrado, Charles J & Su, Tie, 1996. "Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-92, Summer.
  8. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  9. Badrinath, S G & Chatterjee, Sangit, 1988. "On Measuring Skewness and Elongation in Common Stock Return Distributions: The Case of the Market Index," The Journal of Business, University of Chicago Press, vol. 61(4), pages 451-72, October.
  10. Eeckhoudt, Louis & Gollier, Christian & Schneider, Thierry, 1995. "Risk-aversion, prudence and temperance: A unified approach," Economics Letters, Elsevier, vol. 48(3-4), pages 331-336, June.
  11. Aggarwal, Raj & Rao, Ramesh P & Hiraki, Takato, 1989. "Skewness and Kurtosis in Japanese Equity Returns: Empirical Evidence," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(3), pages 253-60, Fall.
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  13. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
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  15. Ekern, Steinar, 1980. "Increasing Nth degree risk," Economics Letters, Elsevier, vol. 6(4), pages 329-333.
  16. Caballero, R.J., 1994. "Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach," Working papers 94-32, Massachusetts Institute of Technology (MIT), Department of Economics.
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