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Non-differentiable transformations preserving stochastic dominance

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Denuit, Michel [UCL] Eeckhoudt, Louis [UCL] Jokung, Octave [Business School Lille-Nice, France]

In this paper, we solve the following problem: when does a stochastic improvement in one risk maintain itself under a non everywhere continuously differentiable transformation of this risk? Using the notion of divided differences, we show that stochastic dominance at the third (and higher) order, and sometimes at the second one, is not preserved after simple piecewise linear transformation of the initial risk. Our analysis complements the one that exists for everywhere continuously differentiable transformations.

Document type Article de périodique (Journal article) – Article de recherche
Access type Accès interdit
Publication date 2013
Language Anglais
Journal information "Journal of the Operational Research Society" - Vol. 64, no. 9, p. 1441-1446 (2013)
Peer reviewed yes
issn 0160-5682
e-issn 1476-9360
Publication status Publié
Affiliation UCL - SSH/LIDAM/CORE - Center for operations research and econometrics
Keywords s-concavity ; s-increasing concavity ; divided differences ; Ekern increase in risk
Links
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Bibliographic reference Denuit, Michel ; Eeckhoudt, Louis ; Jokung, Octave. Non-differentiable transformations preserving stochastic dominance. In: Journal of the Operational Research Society, Vol. 64, no. 9, p. 1441-1446 (2013)
Permanent URL http://hdl.handle.net/2078.1/133116