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The covariance sign of trasnformed random variables with applications to economics and finance
IMA Journal of Managment Mathematics (2011)
  • Martín Egozcue
  • Luis Fuentes García
  • Wing Wong
  • Ricardas Zitikis
Abstract

A number of problems in economics, finance and insurance rely on determining the sign of the covariance of two transformations of a random variable. The classical Chebyshev's inequality offers a powerful tool for solving the problem, but it assumes that the transformations are monotonic, which is not always the case in applications. For this reason, in the present paper, we establish new results for determining the covariance sign and provide further insights into the area. Unlike many previous works, our method of analysis, which is probabilistic in its nature, does not rely on the classical Höffding's representation of the covariance or on any of its numerous extensions and generalizations. We motivate our research with several problems arising in economics, finance and insurance.

Keywords
  • Chebyshev's inequality; convariance inequality
Publication Date
2011
Citation Information
Martín Egozcue, Luis Fuentes García, Wing Wong and Ricardas Zitikis. "The covariance sign of trasnformed random variables with applications to economics and finance" IMA Journal of Managment Mathematics Vol. 22 Iss. 3 (2011)
Available at: http://works.bepress.com/luis_fuentesgarcia/21/