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Financial risk taking in the presence of correlated non-financial background risk. (English) Zbl 1437.91134

Summary: 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.

MSC:

91B05 Risk models (general)
91G10 Portfolio theory
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