On the extension property of dilatation monotone risk measures

Abstract: Let $\mathcal{X}$ be a subset of $L^1$ that contains the space of simple random variables $\mathcal{L}$ and $\rho: \mathcal{X} \rightarrow (-\infty,\infty]$ a dilatation monotone functional with the Fatou property. In this note, we show that $\rho$ extends uniquely to a $\sigma(L^1,\mathcal{L})$ lower semicontinuous and dilatation monotone functional $\overline{\rho}: L^1 \rightarrow (-\infty,\infty]$. Moreover, $\overline{\rho}$ preserves monotonicity, (quasi)convexity, and cash-additivity of $\rho$. Our findings complement recent extension results for quasiconvex law-invariant functionals proved in [17,20]. As an application of our results, we show that transformed norm risk measures on Orlicz hearts admit a natural extension to $L^1$ that retains the robust representations obtained in [4,6].