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Consistent measures of risk

Danielsson, Jon and Zigrand, Jean-Pierre and Jorgensen, Bjørn N. and Sarma, Mandira and de Vries, C. G. (2006) Consistent measures of risk. Discussion paper, 565. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Identification Number: 565

Abstract

In this paper we compare overall as well as downside risk measures with respect to the criteria of first and second order stochastic dominance. While the downside risk measures, with the exception of tail conditional expectation, are consistent with first order stochastic dominance, overall risk measures are not, even if we restrict ourselves to two-parameter distributions. Most common risk measures preserve consistent preference orderings between prospects under the second order stochastic dominance rule, although for some of the downside risk measures such consistency holds deep enough in the tail only. In fact, the partial order induced by many risk measures is equivalent to sosd. Tail conditional expectation is not consistent with respect to second order stochastic dominance.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2006 The Authors
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G0 - General > G00 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 22 Jul 2009 08:25
Last Modified: 27 Feb 2014 15:35
URI: http://eprints.lse.ac.uk/id/eprint/24517

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