The natural Banach space for version independent risk measures

Risk measures, or coherent measures of risk, are often considered on the space L∞, and important theorems on risk measures build on that space. Other risk measures, among them the most important risk measure–the Average Value-at-Risk–are well defined on the larger space L1 and this seems to be the natural domain space for this risk measure. Spectral risk measures constitute a further class of risk measures of central importance, and they are often considered on some Lp space. But in many situations this is possibly unnatural, because any Lp with p>p0, say, is suitable to define the spectral risk measure as well. In addition to that, risk measures have also been considered on Orlicz and Zygmund spaces. So it remains for discussion and clarification, what the natural domain to consider a risk measure is? This paper introduces a norm, which is built from the risk measure, and a new Banach space, which carries the risk measure in a natural way. It is often strictly larger than its original domain and obeys the key property that the risk measure is finite valued and continuous on that space in an elementary and natural way. •We introduce a new Banach space, which is associated with a risk functional.•The Banach space of natural domain is not reflexive and, in general, not an Lp space.•The dual of the space of natural domain is described by stochastic dominance relations.