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on Utility Models and Prospect Theory |
| By: | Günter Franke (University of Konstanz); Erik Lüders (Laval University, Dresdner Bank AG) |
| Abstract: | This paper presents a simple rational expectations model of intertemporal asset pricing. It shows that state-independent heterogeneous risk aversion of investors is likely to generate declining aggregate relative risk aversion. This leads to predictability of asset returns and high and persistent volatility. Stock market crashes may be observed if relative risk aversion differs strongly across investors. Then aggregate relative risk aversion may sharply increase given a small impairment in fundamentals so that asset prices may strongly decline. Changes in aggregate relative risk aversion may also lead to resistance and support levels as used in technical analysis. For numerical illustration we propose an analytical asset price formula. |
| Keywords: | Aggregate relative risk aversion, Equilibrium asset price processes, Excess Volatility, Return predictability, Stock market crashes |
| JEL: | G12 |
| Date: | 2006–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:knz:cofedp:0605&r=upt |
| By: | Broner, Fernando A; Lorenzoni, Guido; Schmukler, Sergio |
| Abstract: | We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies. |
| Keywords: | emerging market debt; financial crises; investor risk aversion; maturity structure; risk premium; term premium |
| JEL: | E43 F30 F32 F34 F36 G15 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6249&r=upt |
| By: | Thomas Dohmen (IZA); Armin Falk (IZA, University of Bonn and CEPR); David Huffman (IZA); Uwe Sunde (IZA, University of Bonn and CEPR) |
| Abstract: | Is the way that people make risky choices, or tradeoffs over time, related to cognitive ability? This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of the population and incentive compatible measures. We conduct choice experiments measuring risk aversion, and impatience over an annual time horizon, for a randomly drawn sample of roughly 1,000 German adults. Subjects also take part in two different tests of cognitive ability, which correspond to sub-modules of one of the most widely used IQ tests. Interviews are conducted in subjects' own homes. We find that lower cognitive ability is associated with significantly more impatient behavior in the experiments, and with greater risk aversion. This relationship is robust to controlling for personal characteristics, educational attainment, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds. |
| Keywords: | risk preference, time preference, cognitive ability, field experiment |
| JEL: | C93 D01 D80 D90 J24 J62 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2735&r=upt |
| By: | Belén Nieto; Gonzalo Rubio |
| Abstract: | This paper analyzes empirically the volatility of consumption-based stochastic discount factors as a measure of implicit economic fears by studying its relationship with future economic and stock market cycles. Time-varying economic fears seem to be well captured by the volatility of stochastic discount factors. In particular, the volatility of recursive utility-based stochastic discount factor with contemporaneous growth explains between 9 and 34 percent of future changes in industrial production at short and long horizons respectively. They also explain ex-ante uncertainty and risk aversion. However, future stock market cycles are better explained by a similar stochastic discount factor with long-run consumption growth. This specification of the stochastic discount factor presents higher volatility and lower pricing errors than the specification with contemporaneous consumption growth. |
| Keywords: | Stochastic discount factor, economic fears, distance between probability measures, volatility of stochastic discount factor, consumption |
| JEL: | G10 G12 E44 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1029&r=upt |
| By: | Ainhoa Jaramillo Gutiérrez (Universitat Jaume I); Nikolaos Georgantzis (Universitat Jaume I); Aurora García Gallego (Universitat Jaume I); Miguel Ginés Vilar (Universitat Jaume I) |
| Abstract: | We study culture and risk aversion as causes of gender differences in ultimatum bargaining. It has often been conjectured in the literature that gender differences in bargaining experiments are partly due to differences in risky decision making. Using the data obtained from our experimental sessions with Spanish subjects, we are able to disentangle risk-related and genuinely gender-specific effects in ultimatum games framed as salary negotiation between an employer and an employee. First, we confirm the broadly accepted result that women are more risk averse than men. Gender differences in both employer and employee-subjects' behavior remain significant after risk attitudes are accounted for. In fact, we show that the reported gender differences are not because of but rather despite females' higher risk aversion. Gender effects are found to depend also on cultural differences. Greek and Spanish females reject more and offer lower wages than males. British subjects exhibit gender effects only with respect to employee behavior, but the sign of the effect is opposite to that observed in the case of Greece and Spain. |
| Keywords: | Ultimatum bargaining, salaries, gender, risk attitudes, experiments |
| JEL: | J30 C91 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2007-08&r=upt |
| By: | Anna Maria Mayda; Kevin H. O'Rourke; Richard Sinnott |
| Abstract: | This paper uses international survey data to document two stylized facts. First, risk aversion is associated with anti-trade attitudes. Second, this effect is smaller in countries with greater levels of government expenditure. The paper thus provides evidence for the microeconomic underpinnings of the argument associated with Ruggie (1982), Rodrik (1998) and others that government spending can bolster support for globalization by reducing the risk associated with it in the minds of voters. |
| JEL: | F13 P16 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13037&r=upt |
| By: | Trenton Smith; Young H. Lee (School of Economic Sciences, Washington State University) |
| Abstract: | Theories of rational addiction posit that certain habit -forming goods "characterized by an increasing marginal utility of consumption "generate predictable dynamic patterns of consumer behavior. It has been suggested that attendance at sporting events represents an example of such a good, as evidenced by the pricing strategies of commercial sports interests. In this essay, we provide new evidence in support of rational addiction for the case of Major League Baseball, but fail to find such support in data from the Korean Professional Baseball League. We then review the scientific literature on sports fans from the perspective of human behavioral ecology and propose a theory of endogenous habit formation among sports fans that could explain our findings. |
| Keywords: | Attendance Demand, Habit Formation, Baseball Addiction, Fan Psychology, Testosterone |
| JEL: | C32 D83 L83 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:tgsmith-3&r=upt |
| By: | Emily Lancsar (University of Newcastle Upon Tyne) |
| Abstract: | The use of Stated Preference Discrete Choice Modelling (SPDCM) is gaining currency in the health economics field as a method of eliciting: preferences for goods and services; the rate at which individuals are prepared to trade off different attributes of a good or service; and the willingness to pay for goods and services. The purpose of this paper is to develop welfare measures from SPDCM data that are consistent with microeconomic welfare theory. The theory of welfare measurement using discrete data and links to the more well known literature using continuous data are presented. The estimation of welfare measures obtained from SPDCM and conjoint analysis experiments reported in the health economics literature to date are discussed, focusing on whether commonly adopted measures are consistent with microeconomic welfare theory. Finally, the Hicksian compensating variation is calculated from discrete data collected from a SPDCM experiment designed to elicit patient preferences for preventive asthma medications. |
| Keywords: | Discrete Choice Modelling, conjoint analysis |
| JEL: | I11 |
| URL: | http://d.repec.org/n?u=RePEc:her:chedps:48&r=upt |