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on Utility Models and Prospect Theory |
| By: | Kevin Amonlirdviman; Carlos Carvalho |
| Abstract: | Loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that the different utility impact of wealth gains and losses leads loss-averse investors to behave similarly to investors with high risk aversion. But if so, should these agents not perceive larger gains from international diversification than standard expected-utility preference agents with plausible levels of risk aversion? They might not, because comovements in international stock markets are asymmetric: Correlations are higher in market downturns than in upturns. This asymmetry dampens the gains from diversification relatively more for loss-averse investors. We analyze the portfolio problem of such an investor who has to choose between home and foreign equities in the presence of asymmetric comovement in returns. Perhaps surprisingly, in the context of the home bias puzzle we find that the loss-averse investors behave similarly to those with standard expected-utility preferences and plausible levels of risk aversion. We argue that preference specifications that appear to perform well with respect to the equity premium puzzle should be subjected to this "test." |
| Keywords: | Stocks - Rate of return ; Risk ; Investments ; Portfolio management |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:430&r=upt |
| By: | Thomas S. Lontzek; Daiju Narita |
| Abstract: | Degradation of ecosystem services may be a major component of climate change damage, and incorporation of this factor could significantly alter the significance of uncertainty in climate-economy modeling. However, this aspect has been little investigated by economic analyses of climate change and uncertainty. We apply standardized numerical techniques of stochastic optimization to this research question. The model results show that the effects of uncertainty are different with different levels of agent’s risk aversion. Also, uncertainty exhibits different effects on mitigation policy and capital investment according to the availability of ecosystem services. Importantly, both the risk aversion and the availability of ecosystem services can change the effects of uncertainty on mitigation not only in level but also in sign. In other words, mitigation could both increase and decrease with climatic uncertainty. The model would provide hints for policymaking in finding a balance between economic growth, climate protection, and the conservation of ecosystems |
| Keywords: | climate change, decision making under uncertainty, stochastic control, renewable resource, ecosystem services |
| JEL: | C63 Q54 D81 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1593&r=upt |
| By: | Claudia Kluppelberg (LMRS); Serguei Pergamenchtchikov (LMRS) |
| Abstract: | We investigate optimal consumption problems for a Black-Scholes market under uniform restrictions on Value-at-Risk and Expected Shortfall for logarithmic utility functions. We find the solutions in terms of a dynamic strategy in explicit form, which can be compared and interpreted. This paper continues our previous work, where we solved similar problems for power utility functions. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1002.2486&r=upt |
| By: | Ennio Bilancini; Leonardo Boncinelli |
| Abstract: | We provide a necessary and sufficient condition for goods to be normal when utility functions are differentiable and strongly quasi-concave. Our condition is equivalent to the condition proposed by Alarie et al. (1990), but it is easier to check: it only requires to compute the minors associated with the border column (or row) of the bordered Hessian matrix of the utility function. |
| Keywords: | normal goods; bordered hessian |
| JEL: | D11 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:042&r=upt |
| By: | Claudia Kluppelberg (LMRS); Serguei Pergamenchtchikov (LMRS) |
| Abstract: | We investigate optimal consumption and investment problems for a Black-Scholes market under uniform restrictions on Value-at-Risk and Expected Shortfall. We formulate various utility maximization problems, which can be solved explicitly. We compare the optimal solutions in form of optimal value, optimal control and optimal wealth to analogous problems under additional uniform risk bounds. Our proofs are partly based on solutions to Hamilton-Jacobi-Bellman equations, and we prove a corresponding verification theorem. This work was supported by the European Science Foundation through the AMaMeF programme. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1002.2487&r=upt |