Increasing risk: Dynamic mean-preserving spreads

We extend the celebrated Rothschild and Stiglitz (1970) definition of Mean-Preserving Spreads to a dynamic framework. We adapt the original integral conditions to transition probability densities, and give sufficient conditions for their satisfaction. We then prove that a specific nonlinear scalar diffusion process, super-diffusive ballistic noise, is the unique process that satisfies the integral conditions among a broad class of processes. This process can be generated by a random superposition of linear Markov processes with constant drifts. This exceptionally simple representation enables us to systematically revisit, by means of the properties of Dynamic Mean-Preserving Spreads, four workhorse economic models originally based on White Gaussian Noise.


Published in:
Journal of Mathematical Economics, https://doi.org/10.1016/j.jmateco.2018.11.003
Year:
2018
Keywords:
Laboratories:




 Record created 2019-02-01, last modified 2019-02-05


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