Comparing Local Risks by Acceptance and Rejection
19 Pages Posted: 10 Mar 2016
Date Written: April 2016
It is said that risky asset h acceptance dominates risky asset k if any decision maker who rejects the investment in h also rejects the investment in k. While in general acceptance dominance is a partial order, we show that it becomes a complete order if only infinitely short investment time horizons are considered. Two indices that induce different variants of this order are proposed, absolute acceptance dominance and relative acceptance dominance, and their properties are studied. We then show that many indices of riskiness that are compatible with the acceptance dominance order coincide with our indices in the continuous‐time setup.
Keywords: riskiness, risk, risk aversion, local risk, acceptance dominance, stochastic dominance
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