A value-of-information approach to measuring risk in multi-period economic activity

In this paper, we discuss measures of risk for uncertain outcomes of economic activity, which are based on the notion of the value of full information in stochastic programs. Information is measured in terms of sigma-algebras. For multi-period income streams information is represented by filtrations, i.e. sequences of sigma-algebras. The basic properties of our risk measures are multi-period coherence ("diversification decreases risk"), compound concavity ("random alternatives increase risk") and convex monotonicity ("insurance decreases risk"). (c) 2005 Elsevier B.V. All rights reserved.