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on Utility Models and Prospect Theory |
| By: | Cadogan, Godfrey |
| Abstract: | We introduce a closed form behavioural stochastic Arrow-Pratt risk process, decomposed into discrete asymmetric risk seeking and risk averse components that run on different local times in ϵ-disks centered at risk free states. Additionally, we embed Arrow-Pratt (“AP”) risk measure in a simple dynamic system of discounted cash flows with constant volatility, and time varying drift. Signal extraction of Arrow-Pratt risk measure shows that it is highly nonlinear in constant volatility for cash flows. Robust identifying restrictions on the system solution confirm that even for small time periods constant volatility is not a measure of AP risk. By contrast, time-varying volatility measures aspects of embedded AP risk. Whereupon maximal AP risk measure is obtained from a convolution of input volatility and idiosyncratic shocks to the system. We provide four applications for our theory. First, we find that Engle, Ng and Rothschild (1990) Factor-ARCH model for risk premia is misspecified because the factor price of risk is time varying and unstable. Our theory predicts that a hyper-ARCH correction factor is required to remove the Factor-ARCH specification. Second, when applied to analysts beliefs about interest rates and volatility, we find that AP risk measure is a feedback control over stochastic cash flows. Whereupon increased risk aversion to negative shocks to earnings increases volatility. Third, we use an oft cited example of Benes, Shepp and Witsenhausen (1980) to characterize a controlled AP diffusion for a conservative investor who wants to minimize the AP risk process for an asset. Fourth, we recover stochastic differential utility functional from the AP risk process and show how it is functionally equivalent to Duffie and Epstein’s (1992) parametrization. |
| Keywords: | behavioural Arrow-Pratt risk process; asymmetric risk decomposition; asset pricing; Markov process; local martingale; local time change |
| JEL: | G12 C00 G31 |
| Date: | 2009–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20174&r=upt |
| By: | Aleksandar Mijatovic; Paul Schneider |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wbs:wpaper:wp09-03&r=upt |
| By: | Li King King (Strategic Interaction Group, Max Planck Institute of Economics, Jena) |
| Abstract: | Preference for control affects investment behavior. Participants of laboratory experiments invest different amount of money in a risky asset when face with two different methods of control which have identical payoff structure and probability distribution, but provide different sense of control. Preference for controlling and not controlling are both observed. Participants increase their investment when their preferred method of control is used. Participants who prefer to control more reduce their investment more strongly when face with less control. Preference for control has larger effect on investment behavior when participants are induced to have a comparative mindset rather than non-comparative mindset. |
| Keywords: | Preference for control, sense of control, risk attitudes, illusion of control, source preference, portfolio choice, behavioral finance, comparative mindset, non-comparative mindset |
| JEL: | B49 C91 D81 G11 G19 |
| Date: | 2010–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-004&r=upt |
| By: | Marc-Arthur Diaye (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); François Gardes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Christophe Starzec (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Cet article discute de la compatibilité du comportement des consommateurs dans la vie réelle avec l'axiome GARP. A partir du panel polonais de 1987 à 1990, nous montrons que seulement 240 des 3630 ménages violent GARP. Ces violations ne semblent néanmoins pas indiquer un comportement irrationnel: elles correspondraient plutôt à des changements dans les conditions de choix des agents dans une période caractérisée par le passage d'une économie de rationnement à une économie de marché. |
| Keywords: | GARP, Prix virtuels. |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00449463_v1&r=upt |
| By: | Felipe Vásquez (Departamento de Economía, Universidad de Concepción.); Michael Hanemann (Department of Agricultural and Resource Economics,University of California, Berkeley) |
| Abstract: | In this paper we present a new utility model that serves as the basis for modeling discrete/continuous consumer choices with a general corner solution.The new model involves a more flexible representation of preferences than what has been used in the previous literature and, unlike most of this literature, it is not additively separable. This functional form can handle richer substitution patterns such as complementarity as well as substitution among goods. We focus in part on the Quadratic Box-Cox utility function and examine its properties from both theoretical and empirical perspectives. We identify the significance of the various parameters of the utility function, and demonstrate an estimation strategy that can be applied to demand systems involving both a small and large number of commodities. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cnc:wpaper:08-2009&r=upt |
| By: | Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development); Pragidis, Ioannis (Democritus University of Thrace, Department of International Economic Relations and Development) |
| Abstract: | In this paper we examine the predictability power of long term risk premium over Housing prices in U.S.A. of a period of 19 years (1991-2009). For reasons that are cited clearly in the text, the interest rate risk premium is preferred over yield curve. Under a probit framework, it is tested whether recent housing pricing bust could have been predicted. We employ adaptive expectations for the formation of the agents’ short-term interest rate expectations. The ability to forecast such price changes is of great importance to investors and analysts of the housing market and for the design of financial institutions’ mortgage policy in a more prudential path. |
| Keywords: | Housing prices; risk premium; probit; forecasting |
| JEL: | D58 D74 E31 G21 G32 H20 R20 |
| Date: | 2010–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2010_001&r=upt |