Multivariate Stochastic Dominance for Risk Averters and Risk Seekers

Wing-Keung Wong, Martin Egozcue
2010 Social Science Research Network  
This paper first extends some well-known univariate stochastic dominance results to multivariate stochastic dominances (MSD) for both risk averters and risk seekers, respectively, to n order for any n ≥ 1 when the attributes are assumed to be independent and the utility is assumed to be additively and separable. Under these assumptions, we develop some properties for MSD for both risk averters and risk seekers. For example, we prove that MSD are equivalent to the expected-utility maximization
more » ... lity maximization for both risk averters and risk seekers, respectively. We show that the hierarchical relationship exists for MSD. We establish some dual relationships between the MSD for risk averters and risk seekers. We develop some properties for non-negative combinations and convex combinations random variables of MSD and develop the theory of MSD for the preferences of both risk averters and risk seekers on diversification. At last, we discuss some MSD relationships when attributes are dependent and discuss the importance and the use of the results developed in this paper. JEL classification: D81, G11 Before we discuss the theory further, we state the definitions of the sets of utility functions for risk averters and risk seekers, U A j and U D j , for the MSD as follows: such that: where u i is the utility on X i satisfying (−1) j u (j) ≤ 0 for any integer j if u ∈ U A J and satisfying
doi:10.2139/ssrn.1664926 fatcat:7jw3qtsstjdfpeuhjqe42avq6y