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on Utility Models and Prospect Theories |
| By: | Christelle Viauroux |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cin:ucecwp:2007-01&r=upt |
| By: | Ingrid Größl; Ulrich Fritsche |
| Abstract: | We analyse how money as a store of value affects the decisions of a representative household under diversifiable and non-diversifiable risks given that the central bank successfully stabilizes the rate of inflation at a low level. Assuming exponential utility allows us to derive an explicit relationship between optimal money holdings, the household's desire to tilt, smooth and stabilize consumption as well as minimize portfolio risk. In this context we also show how the correlation between stochastic labour income and stock returns impact the store-of-value function of money. Finally we prove that the store-of-value benefits of money holdings continue to hold even if we take riskless alternatives into account. |
| Keywords: | Money demand, consumption, CRRA, CARA, exponential utility, households, risk, risk management |
| JEL: | D11 E21 E41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp660&r=upt |
| By: | Vittorio Pelligra |
| Abstract: | Psychological Game Theory (PGT) extends classical game theory allowing for the formal analysis of belief-dependent sentiments and emotions such as resentment, pride, shame, gratefulness, and the like. PGT incorporates these factors by relating agents' subjective expected utility to players' strategies, to their beliefs about others' strategies, but also to their beliefs about others' beliefs about their strategies, and so on. This paper argues that, thanks to the epistemic consequences of this hierarchy of beliefs, PGT is well-endowed to address, and to some extent solve three of the most challenging problems recently emerged in classical game theory, namely, the problem of intentions, that of trust and that of decision frames. |
| Keywords: | Psychological games, intentions, trust, decision frames. |
| JEL: | C72 C79 C9 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:200702&r=upt |
| By: | Knud Jørgen Munk (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Dixit’s 1975 paper "Welfare Effects of Tax and Price Changes" constitutes a seminal contribution to the theory of tax reform within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which has led to misinterpretation of some of Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted. In models which impose additive separability between consumption and leisure in household preferences this insight cannot be articulated. This paper proposes as an alternative a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. It also demonstrates how standard compensated price elasticities can be derived from the parameters of the CES-UT and how it may be used for applied tax reform analysis. |
| Keywords: | Public economics, optimal taxation, tax reform, tax simulation, CGE models |
| JEL: | H2 |
| Date: | 2006–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2006-15&r=upt |
| By: | Simone Manganelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper shows how the problem of mean-downside risk portfolio allocation can be cast in terms of penalized least squares (PLS). The penalty is given by a power function of the returns below a certain threshold. We derive the asymptotic properties of the PLS estimator, allowing for possible nonlinearities and misspecification of the model. We illustrate the usefulness of this new class of estimators with two empirical applications. First, we estimate an autoregressive model, in the spirit of the GARCH literature. Second, we suggest a simple strategy to derive the optimal portfolio weights associated to a mean-downside risk model. JEL Classification: C14, C22, G11. |
| Keywords: | Portfolio otpimization, mean-risk utility model, stochastic dominance, asymmetric least squares, expectile. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070723&r=upt |
| By: | Frank Caliendo; Kevin X. D. Huang |
| Abstract: | Overconfidence is a widely documented phenomenon. Empirical evidence reveal two types of overconfidence in financial markets: investors both overestimate the average rate of return to their assets and underestimate uncertainty associated with the return. This paper explores implications of overconfidence in financial markets for consumption over the life cycle. The authors obtain a closed-form solution to the time-inconsistent problem facing an overconfident investor/consumer who has a CRRA utility function. They use this solution to show that overestimation of the mean return gives rise to a hump in consumption during the work life if and only if the elasticity of intertemporal substitution in consumption is less than unit. They find that underestimation of uncertainty has little effect on the long-run average behavior of consumption over the work life. Their calibrated model produces a hump-shaped work-life consumption profile with both the age and the amplitude of peak consumption consistent with empirical observations. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-3&r=upt |
| By: | Yiannis Kamarianakis (Regional Analysis Division, Institute of Applied and Computational Mathematics, Foundation for Research and Technology-Hellas, Greece); Anastasios Xepapadeas (Department of Economics, University of Crete, Greece) |
| Abstract: | We consider a single-asset investment fund that in the absence of transactions costs would hold a constant amount of wealth in the risky asset. In the presence of market frictions wealth is allowed to fluctuate within a control band: Its upper (lower) boundary is chosen so that gains (losses) from adjustments to the target minus (plus) fixed plus proportional transaction costs maximize (minimize) a power utility function. We compare stochastic impulse control policies derived via ergodic and discounted optimization criteria. For the solution of the ergodic problem we use basic tools from the theory of diffusions whereas the discounted problem is solved after being characterized as a system of quasi-variational inequalities. For both versions of the problem, derivation of the control bands pertains to the numerical solution of a system of nonlinear equations. We solve numerous such systems and present an extensive comparative sensitivity analysis with respect to the parameters that characterize investor’s preferences and market behavior. |
| Keywords: | Transaction costs; stochastic impulse control; ergodic criteria |
| JEL: | C61 G11 |
| Date: | 2006–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0709&r=upt |
| By: | Bonomi Genny; Brosio Giorgio (University of Turin); Di Tommaso Maria Laura (University of Turin) |
| Abstract: | The share of elected positions held by women in democratic countries is still very small. To increase this share many countries bave introduced gender quotas in their electoral rules. In Italy gender quotas, requiring a minimum number of women in electoral lists, bave been introduced for elections at different levels of goverrnnent. This type of quotas does noi ensure in ara open list electoral system that women will get more votes. This effect will depend ora tbc extent to which there is an anti-female bias among voters. To test the presence of an anti-female bias in voting behaviour we set up a random utility model for voting behaviour. The model is then tested ora tbc elections for regional councils in 1995 and 2000. The results show that a higher share of women in party lists leads to a significant increase in the probability that voters will choose a female candidate. This implies that voters are willing to vote more for women (there is noi a perfect gender bias against women). Other important factors influencing voters' behaviour are the length of the party list (the longer the party list, and thus the greater the site of electoral districts, the lower the probability of voting for ara inctimbent candidate) and the position of the party in terms of liberal values. The more tbc party is liberal in terms of these values, tbc higher tbc probability that a woman will be voted. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:uto:dipeco:200609&r=upt |