Leandro Gorno, FGV EPGE Brazilian School of Economics and Finance

Paper: Dynamic Stochastic Dominance

Abstract: This paper extends the notion of stochastic dominance to dynamic environments. Our main result is a characterization of the dominance orders between stochastic payoff processes given by unanimity within groups of discounted expected utility maximizers. We explore the implications of this characterization in case of first order dynamic stochastic dominance when payoffs follow standard diffusion processes. We define a measure which quantifies the intensity of the dominance of a payoff process over another and we use this measure to obtain robust bounds on asset price differentials.