How Does a Change in Downside Risk Affect Optimal Demand for a Risky Asset? : Comparative Statics on Tail Conditional Expectation

This paper explains the equivalence of Tail Conditional Expectation (TCE), a measure of downside risk, and second-degree stochastic dominance. We also establish sufficient conditions for a distribution change leading to a TCE reduction in portfolio choices with one risky and risk-free asset, increasing optimal demand for the risky asset. The results imply that risk-averse agents may increase the optimal demand for the risky asset when the downside risk premium increases. Furthermore, evaluating TCE or the downside risk premium is compatible with second-degree stochastic dominance