Coordinators: Prof. Jean-Louis Arcand (International Economics, The Graduate Institute) and Prof. Max-Olivier Hongler (Laboratory of Microengineering for Manufacturing, EPFL)
This research extends the celebrated Rothschild and Stiglitz (1970) definition of Mean Preserving Spreads to scalar diffusion processes. We provide sufficient conditions under which a family of diffusion processes satisfies the dynamic counterparts to the famous Rothschild and Stiglitz integral conditions. We prove that the only Brownian bridge with non-constant drift that displays the Dynamic Mean-Preserving Spread (DMPS) property is given by the ballistic super-diffusive process. We illustrate our results in the context of the cannonical examples of investment under uncertainty and option pricing.
Paper on "Increasing Risk: Dynamic Mean-Preserving Spreads" to be published in 2019 in the Journal of Mathematical Economics.