Distribution-Invariant Dynamic Risk Measures
The paper provides an axiomatic characterization of dynamic risk measures for multi-period financial positions. For the special case of a terminal cash flow, we require that risk depends on its conditional distribution only. We prove a representation theorem for dynamic risk measures and investigate their relation to static risk measures. Two notions of dynamic consistency are proposed. A key insight of the paper is that dynamic consistency and the notion of ?measure convex sets of probability measures? are intimately related. Measure convexity can be interpreted using the concept of compound lotteries. We characterize the class of static risk measures that represent consistent dynamic risk measures. It turns out that these are closely connected to shortfall risk. Under weak additional assumptions, static convex risk measures coincide with shortfall risk, if compound lotteries of acceptable respectively rejected positions are again acceptable respectively rejected. This result implies a characterization of dynamically consistent convex risk measures.
|Date of creation:||2003|
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- Frittelli, Marco & Rosazza Gianin, Emanuela, 2002. "Putting order in risk measures," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1473-1486, July.
- Stefan Jaschke & Uwe Küchler, 2001. "Coherent risk measures and good-deal bounds," Finance and Stochastics, Springer, vol. 5(2), pages 181-200.
- Carlier, Guillaume & Dana, Rose-Anne, 2003. "Core of convex distortions of a probability," Economics Papers from University Paris Dauphine 123456789/5446, Paris Dauphine University.
- Larry G. Epstein & Martin Schneider, 2001.
RCER Working Papers
485, University of Rochester - Center for Economic Research (RCER).
- Carlier, G. & Dana, R. A., 2003. "Core of convex distortions of a probability," Journal of Economic Theory, Elsevier, vol. 113(2), pages 199-222, December.
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