Market behavior when preferences are generated by second-order stochastic dominance
Dana, Rose-Anne (2004), Market behavior when preferences are generated by second-order stochastic dominance, Journal of Mathematical Economics, 40, 6, p. 619-639. http://dx.doi.org/10.1016/j.jmateco.2003.05.001
TypeArticle accepté pour publication ou publié
Journal nameJournal of Mathematical Economics
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Abstract (EN)We develop a theory of decision making and General Equilibrium for contingent markets when incomplete preferences are generated by second-order stochastic dominance (SSD). Demand, Pareto-optima and equilibria dominance are fully characterized. Demands and equilibrium allocations are non-increasing functions of the pricing density and Pareto-optimal allocations are comonotone. They generalize mean–variance demands and CAPM equilibrium allocations which are non-increasing affine functions of the pricing density. They are not observationally distinguishable from those of von-Neumann–Morgenstern decision makers with increasing strictly concave utilities nor from those of strict risk averse non-expected utility maximizers.We also show that expenditure functions associated to second-order stochastic dominance, provide microeconomic foundations for a class of law invariant risk-measures used in mathematical finance.
Subjects / KeywordsMarket; Behavior; Stochastic
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