Abstract
This paper characterizes the stochastic deterioration resulting from taking a zero-mean financial risk in the presence of correlated non-financial background risk. We show in particular that it has an equivalent stochastic order as well as a necessary and sufficient "integral condition" that implies and is implied by a particular sense in which the stochastic deterioration can be decomposed into a "correlation increase" and a "marginal risk increase". We further characterize a measure of aversion to the stochastic deterioration. These characterizations provide for a more general framework for formulating concepts of increases in risk and correlation and for better understanding risk management decisions governed by individuals' attitudes to them.
Original language | English |
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Pages (from-to) | 167-179 |
Number of pages | 12 |
Journal | Journal of Mathematical Economics |
Volume | 88 |
Early online date | 2 Apr 2020 |
DOIs | |
Publication status | E-pub ahead of print - 2 Apr 2020 |
Keywords
- non-financial background risk, expectation dependence, portfolio choice, correlation aversion, correlated risks, marginal risk increase