Correlation Order, Merging and Diversification

24 Pages Posted: 1 May 2009 Last revised: 12 May 2010

See all articles by Jan Dhaene

Jan Dhaene

Katholieke Universiteit Leuven

Michel Denuit

Catholic University of Louvain

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: April 30, 2009

Abstract

We investigate the influence of the dependence between random losses on the shortfall and on the diversification benefit that arises from merging these losses.

We prove that increasing the dependence between losses, expressed in terms of correlation order, has an increasing effect on the shortfall, expressed in terms of an appropriate integral stochastic order. Furthermore, increasing the dependence between losses decreases the diversification benefit.

We also consider merging comonotonic losses and show that even in this extreme case a strictly positive diversification benefit will often arise.

Suggested Citation

Dhaene, Jan and Denuit, Michel and Vanduffel, Steven, Correlation Order, Merging and Diversification (April 30, 2009). Final version in Insurance: Mathematics and Economics, Vol. 45, 325-332. Available at SSRN: https://ssrn.com/abstract=1397288

Jan Dhaene (Contact Author)

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

Michel Denuit

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

Steven Vanduffel

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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