|
on Utility Models and Prospect Theory |
| By: | Rose-Anne Dana (CEREMADE, UMR CNRS 7534, Université Paris IX Dauphine); Frank Riedel (Institute of Mathematical Economics, Bielefeld University) |
| Abstract: | We study a dynamic and infinite-dimensional model with Knightian uncertainty modeled by incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk-adjusted prior and use the same subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agents' multiple prior sets. We show that the set of equilibria with inertia contains the equilibria of the economy with variational preferences anchored at the initial endowments. A case study in an economy without aggregate uncertainty shows that risk is fully insured, while uncertainty can remain fully uninsured. Pessimistic agents with Gilboa-Schmeidler's max-min preferences would fully insure risk and uncertainty. |
| Keywords: | Knightian Uncertainty, Ambiguity, Incomplete Preferences, General Equilibrium Theory, No Trade |
| JEL: | D51 D81 D91 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:440&r=upt |
| By: | Rydqvist, Kristian (Binghamton University) |
| Abstract: | Swedish lottery bonds are valuable tax shelters before the tax reform of 1991. By trading around the coupon lottery, high-tax investors with capital gains from the stock market shift their tax liability to low-tax investors. The uncertainty of the coupon lottery and the effort of verifying the winning lottery bond numbers are a nuisance to tax traders. We investigate how the Treasury (issuer), market makers (banks), and lottery bond investors respond to those frictions. |
| Keywords: | Tax arbitrage; Coupon lottery; Lottery number checking; Ex-dividend day; Turn-of-the-year effect; Rationing; Underpricing |
| JEL: | G12 G18 |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0070&r=upt |
| By: | Hooi Hooi Lean (School of Social Sciences, Universiti Sains Malaysia); Michael McAleer (Erasmus School of Economics, Erasmus University Rotterdam,); Wing-Keung Wong (Department of Economics, Hong Kong Baptist University) |
| Abstract: | This paper examines investor preferences for oil spot and futures based on mean-variance (MV) and stochastic dominance (SD). The mean-variance criterion cannot distinct the preferences ofspot and market whereas SD tests leads to the conclusion that spot dominates futures in the downside risk while futures dominate spot in the upside profit. It is also found that risk-averse investors prefer investing in the spot index, whereas risk seekers are attracted to the futures index to maximize their expected utilities. In addition, the SD results suggest that there is no arbitrage opportunity between these two markets. Market efficiency and market rationality are likely to hold in the oil spot and futures markets. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf220&r=upt |
| By: | Dreber, Anna (Institute for Financial Research); Rand, David G. (Harvard University); Garcia, Justin R. (Binghamton University); Wernerfelt, Nils (Toulouse School of Economics); Lum, J. Koji (Binghamton University); Zeckhauser, Richard (Harvard University) |
| Abstract: | Individuals differ significantly in their willingness to take risks. Such differences may stem, at least in part, from individual biological (genetic) differences. We explore how risk-taking behavior correlates with different versions of the dopamine receptor D4 gene (DRD4), which has been implicated in previous studies of risk taking. We investigate risk taking in three contexts: economic risk taking as proxied by a financial gamble, self-reported general risk taking, and self-reported behavior in risk-related activities. Our participants are serious tournament bridge players with substantial experience in risk taking. Presumably, this sample is much less varied in its environment than a random sample of the population, making genetic based differences easier to detect. A prior study (Dreber et al. 2010) looked at risk taking by these individuals in their bridge decisions. Here we examine the riskiness of decisions they take in other contexts. We find evidence that individuals with a 7-repeat allele (7R+) of DRD4 take significantly more economic risk in an investment game than individuals without this allele (7R-). Interestingly, this positive relationship is driven by the men in our study, while the women show a negative but non-significant result. Even though the number of 7R+ women in our sample is low, our results may indicate a gender difference in how the 7R+ genotype affects behavior, a possibility that merits further study. Considering other risk measures, we find no difference between 7R+ and 7R- individuals in general risk taking or any of the risk-related activities. Overall, our results indicate that the dopamine system plays an important role in explaining individual differences in economic risk taking in men, but not necessarily in other activities involving risk. |
| Keywords: | Risk preferences; Dopamine; Risk taking; Risk perception; DRD4 |
| JEL: | C91 C93 D81 D87 G00 |
| Date: | 2010–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0071&r=upt |
| By: | Suen, Richard M. H. |
| Abstract: | This paper analyzes the optimal consumption behavior of a consumer who faces uninsurable labor income risk and borrowing constraints. In particular, it provides conditions under which the decision rule for consumption is a concave function of existing assets. The current study presents two main findings. First, it is shown that the consumption function is concave if the period utility function is drawn from the HARA class and has either strictly positive or zero third derivative. Second, it is shown that the same result can be obtained for certain period utility functions that are not in the HARA class. |
| Keywords: | Consumption function; borrowing constraints; precautionary saving |
| JEL: | D91 E21 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24927&r=upt |
| By: | Owen, Mark; Campi, Luciano |
| Abstract: | We present an optimal investment theorem for a currency exchange model with random and possibly discontinuous proportional transaction costs. The investor’s preferences are represented by a multivariate utility function, allowing for simultaneous consumption of any prescribed selection of the currencies at a given terminal date. We prove the existence of an optimal portfolio process under the assumption of asymptotic satiability of the value function. Sufficient conditions for asymptotic satiability of the value function include reasonable asymptotic elasticity of the utility function, or a growth condition on its dual function. We show that the portfolio optimization problem can be reformulated in terms of maximization of a terminal liquidation utility function, and that both problems have a common optimizer. |
| Keywords: | Lagrange Duality; Multivariate Utility Function; Asymptotic Satiability; Optimal Portfolio; Transaction Costs; Foreign Exchange Market; Duality Theory; |
| JEL: | G11 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/2318&r=upt |
| By: | Maria Grith; Volker Krätschmer |
| Abstract: | This chapter deals with the estimation of risk neutral distributions for pricing index options resulting from the hypothesis of the risk neutral valuation principle. After justifying this hypothesis, we shall focus on parametric estimation methods for the risk neutral density functions determining the risk neutral distributions. We we shall differentiate between the direct and the indirect way. Following the direct way, parameter vectors are estimated which characterize the distributions from selected statistical families to model the risk neutral distributions. The idea of the indirect approach is to calibrate characteristic parameter vectors for stochastic models of the asset price processes, and then to extract the risk neutral density function via Fourier methods. For every of the reviewed methods the calculation of option prices under hypothetically true risk neutral distributions is a building block. We shall give explicit formula for call and put prices w.r.t. reviewed parametric statistical families used for direct estimation. Additionally, we shall introduce the Fast Fourier Transform method of call option pricing developed in [6]. It is intended to compare the reviewed estimation methods empirically. |
| Keywords: | Risk neutral valuation principle, risk neutral distribution, logprice risk neutral distribution, risk neutral density function, Black Scholes formula, Fast Fourier Transform method, log-normal distributions, mixtures of log-normal distributions, generalized gamma distributions, model calibration, Merton’s jump diffusion model, Heston’s volatility model |
| JEL: | C13 C16 G12 G13 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-045&r=upt |