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on Utility Models and Prospect Theory |
| By: | John Cotter (University College Dublin); Jim Hanly (Dublin Institute of Technology) |
| Abstract: | A key issue in the estimation of energy hedges is the hedgers’ attitude towards risk which is encapsulated in the form of the hedgers’ utility function. However, the literature typically uses only one form of utility function such as the quadratic when estimating hedges. This paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log, exponential and quadratic, and we incorporate these in our hedging frameworks. We find significant differences in the optimal hedge strategies based on the utility function chosen. |
| Keywords: | Energy; Hedging; Risk Management; Risk Aversion; Forecasting |
| JEL: | G10 G12 G15 |
| Date: | 2011–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201106&r=upt |
| By: | Syngjoo Choi; Shachar Kariv; Wieland Mueller; Dan Silverman |
| Abstract: | Revealed preference theory o¤ers a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximize. We conduct a large-scale ?eld experiment that enables us to test subjects?choices for consistency with utility maximization and to combine the experimental data with a wide range of individual socioeco-nomic information for the subjects. There is considerable heterogeneity in subjects?consistency scores: high-income and high-education subjects display greater levels of consistency than low- income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. We also ?nd that consistency with utility maximization is strongly related to wealth: a standard deviation increase in the consistency score is associated with 15-19 percent more wealth. This result conditions on socioeconomic variables including current income, education, and family structure, and is little changed when we add controls for past income, risk tolerance and the results of a standard personality test used by psychologists. |
| JEL: | C93 D01 D12 D81 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1105&r=upt |
| By: | Jonathan Benchimol (Economics Department - ESSEC Business School); André Fourçans (Economics Department - ESSEC Business School) |
| Abstract: | Cet article présente un modèle théorique et empirique de la zone euro, en mettant en perspective le rôle de la monnaie. Le modèle s'inscrit dans le cadre « Nouveaux Keynésiens-DSGE », la monnaie étant introduite dans la fonction d'utilité des ménages sous une forme non-séparable. En testant le modèle selon la méthode bayésienne nous expliquons la variance de la production et de l'inflation, mais aussi du taux d'intérêt, des balances réelles, de la production et des balances réelles en prix flexibles. Le rôle de la monnaie est analysé plus particulièrement. Nous montrons que son impact sur la production dépend du degré d'aversion au risque des agents, qu'il augmente avec ce degré, et qu'il devient significatif quand l'aversion au risque inter-temporel est suffisamment élevée. L'impact direct de la monnaie est en revanche très limité pour expliquer la variance de l'inflation, la politique monétaire, via le taux d'intérêt, constituant le facteur dominant. |
| Keywords: | Estimation bayésienne ; Modèle DSGE ; Monnaie ; Zone euro |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00572374&r=upt |
| By: | Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | Both the equilibrium interest rate and the equity premium, as well as risk premiums of risky investments are all important quantities in cost-benefit analyses. In the light of the current (2008 -) financial crisis, it is of interest to study models that connect the the financial sector with the real economy. The effects of climate change has, on the other hand, been the subject of extensive discussions, for example in connection with the Stern report. The paper addresses both these issues, first based on standard assumptions. In particular we investigate what is needed to have long-term interests lower than short term rates. Our model allows us to tell what happens to risk premiums in turbulent times, consistent with observations. Next we extend the pure exchange model to a production economy. As a result we obtain an equilibrium term structure of interest rates, as well as a model for the equity premium. We end by a discussion of risk adjustments of the discount factor. For projects aimed at insuring future consumption, the interest rate is smaller than the risk free rate. Mitigation can have the characteristics of such a project. |
| Keywords: | Dynamic equilibrium; the Lucas model; term structure; CIR; pure exchange; production economy; equity premium puzzle; risk free rate puzzle; climate models; Stern Review |
| JEL: | D00 G00 |
| Date: | 2011–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2011_004&r=upt |
| By: | Stephen BAZEN (GREQAM, CNRS, UMR 6579); Patrick MOYES (GREThA, CNRS, UMR 5113) |
| Abstract: | Stochastic dominance has been typically used with a special emphasis on risk and in-equality reduction something captured by the concavity of the utility function in the expected utility model. We claim that the applicability of the stochastic dominance ap-proach goes far beyond risk and inequality measurement provided suitable adaptations be made. We apply in the paper the stochastic dominance approach to the measurement of elitism which may be considered the opposite of egalitarianism. While the usual stochastic dominance quasi-orderings attach more value to more equal and more effi-cient distributions, our criteria ensure that, the more unequal and the more efficient the distribution, the higher it is ranked. Two instances are provided by (i) comparisons of scientific performance across institutions like universities or departments, and (ii) com-parisons of affluence as opposed to poverty between countries. |
| Keywords: | Decumulative Distribution Functions, Stochastic Dominance, Regressive Transfers, Elitism, Scientific Performance, Affluence |
| JEL: | D31 D63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2011-08&r=upt |