Comparative Statics under Uncertainty with the Monotone Likelihood Ratio Order
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Abstract
In a simple two asset portfolio problem with one-risky and one-safe asset, Landsberger and Meilijson (1990) have shown that a monotone likelihood ratio (MLR) improvement of random returns of the risky asset increases the demand for the asset for all investors with non-decreasing utilities. However, their comparative static statement is made only for the simplest case where the payoff function is linear in both the choice and the random variable. This paper improves the robustness of their result in two ways. One is that the same comparative static statement can also be made for cases of non-linear payoffs. Another improvement is given by extending the admissible set of changes in randomness with the same utility settings. When the concerned payoff is linear in the choice variable, we show that the MLR order is unduly restrictive for the comparative static result and replace it with a more general type of change in randomness, called a “one-side monotone likelihood ratio with respect to a point.”
참고문헌 (11)
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