Increasing Risk: Some Direct Constructions
JOURNAL OF RISK AND UNCERTAINTY, Vol 14 No 2
Posted: 30 Apr 1997
This paper extends the classic Rothschild-Stiglitz characterization of comparative risk ("increasing risk") in two directions. By adopting a more general definition of "mean preserving spread," it provides a direct construction of a sequence of MPS's linking any pair of distributions that are ranked in terms of comparative risk. It also provides a direct, explicit construction of a zero- conditional-mean "noise" variable for any such pair of distributions. Both results are extended to the case of second order stochastic dominance.
JEL Classification: D81
Suggested Citation: Suggested Citation