Distortion Risk Measures, ROC Curves, and Distortion Divergence
21 Pages Posted: 22 Apr 2017 Last revised: 19 Oct 2017
Date Written: October 18, 2017
Distortion functions are employed to define measures of risk. Receiver operating characteristic (ROC) curves are used to describe the performance of parametrized test families in testing a simple null hypothesis against a simple alternative. This paper provides a connection between distortion functions on the one hand, and ROC curves on the other. This leads to a new interpretation of some well known classes of distortion risk measures, and to a new notion of divergence between probability measures.
Keywords: distortion risk measures, hypothesis testing, receiver operating characteristic, divergence
JEL Classification: G22, C12
Suggested Citation: Suggested Citation