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on Utility Models and Prospect Theory |
| By: | Pataracchia, B. (Tilburg University, Center for Economic Research) |
| Abstract: | Using a simple dynamic consumption-based asset pricing model, this paper explores the implications of a representative investor with smooth ambiguity averse preferences [Klibano¤, Marinacci and Mukerji, Econometrica (2005)] and provides a comparative analysis of risk aversion and ambiguity aversion. The perception of ambiguity is described by a hidden Markovian consumption growth process. The hidden states di¤er both for the mean and the volatility. We show that the ambiguity-averse investor downweights high-mean states in favor of low-mean ones. However, such distortion appears much stronger in low-volatility regimes: high volatility attenuates the distortion due to ambiguity concerns. It follows that (i) ambiguity aversion always implies higher equity premia but sustained levels of ambiguity aversion do not help explaining the high volatility of the equity premium observed in the data (volatility puzzle); (ii) our calibrated model can match the moments of the equity premium and risk free rate and can generate asset-price stylized facts like a procyclical price-dividend ratio and countercyclical conditional equity premia; however, (iii) high levels of ambiguity aversion, necessary to explain high equity returns, produce counterfactual price-dividend ratio time series across volatility states. |
| Keywords: | Ambiguity aversion;volatility;asset pricing puzzles;robustness. |
| JEL: | D81 E44 G12 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011042&r=upt |
| By: | Marielle Brunette (Laboratoire d'Economie Forestiere, Nancy, France); Laure Cabantous (Nottingham University Business School); Stéphane Couture (Unité de Biométrie et Intelligence Artificielle (UBIA), Toulouse, France) |
| Abstract: | In this paper, we build on the emerging literature on group decision-making to study the so-called ‘group shift’ effect, i.e., groups are less risk-averse than individuals. Our study complements past research in two ways. First, we study the group shift effect under two sources of uncertainty, namely risk where probabilities are known, and ambiguity where probabilities are imprecise. Second, we study the impact of the group decision rule (unanimity and majority) on group shift. Results from a lottery-choice experiment show a general tendency for the group shift effect, regardless of the decision rule. The group shift effect, however, is found to be significant only under risk in the unanimity treatment. Our study hence provides a clear test of the effect of the decision rule on the group shift effect under both risk and ambiguity. |
| Keywords: | Collective decision, Unanimity, Majority, Preferences, Risk, Ambiguity |
| JEL: | C91 C92 |
| Date: | 2011–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbr:workpa:15&r=upt |
| By: | Johannes Abeler (University of Nottingham); Armin Falk (University of Bonn); Lorenz Goette (University of Lausanne); David Huffman (Swarthmore College) |
| Abstract: | A key open question for theories of reference-dependent preferences is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low. |
| Keywords: | Reference Points, Expectations, Loss Aversion, Disappointment, Experiment |
| JEL: | C91 D01 D84 J22 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:358&r=upt |
| By: | Schroyen, Fred (Dept. of Economics, Norwegian School of Economics and Business Administration) |
| Abstract: | Considering a consumer with standard preferences, I trace out the consequences for risk aversion and prudence of quantity constraints on markets. I first show how the effect can be decomposed into a price risk effect and an endogenously changing risk aversion/prudence effect. Next, I calibrate locally both effects on relative risk aversion and prudence, using estimates on household demand for durables and labour supply. Finally, I performa global numerical analysis of these effects. I conclude that quantity constraints have counter-intuitive and pronounced non-linear effects on risk attitudes. |
| Keywords: | Household demand; income risk aversion; prudence; quantity constraints; labour supply. |
| JEL: | D11 D81 |
| Date: | 2011–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2011_007&r=upt |
| By: | Glenn W. Harrison; J. Todd Swarthout |
| Abstract: | The most popular experimental method for eliciting time preferences involves subjects making choices over smaller, sooner amounts of money and larger, later amounts of money. Under some theoretically possible configurations of preferences and procedures, the discount rates inferred from these choices could lead to misleading inferences about time preferences for consumption. Using a direct empirical test, we show that those configurations of preferences are empirically implausible. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2011-09&r=upt |
| By: | Dan Luo (University of Nottingham); Iris Biefang-Frisancho Mariscal (University of the West of England); Peter Howells (University of the West of England) |
| Abstract: | We use vector autoregressive models to estimate the effect of monetary policy on investors’ risk aversion. The latter is proxied by a variety of option based implied volatility indices for Germany and the UK. There is clear evidence of a procyclical response between monetary policy and risk aversion. Monetary policy shocks affect UK investors risk attitude for longer periods, while they have a stronger impact on German investors for a shorter period of time. There is also evidence that the Bank of England reacts to increases in risk aversion with expansionary monetary policy. In contrast, the ECB appears to tighten monetary policy, although this result may be explained by the ECB making policy decisions for a group of countries. These results are robust w.r.t. to the various risk aversion and monetary policy stance proxies. |
| Keywords: | Monetary policy, Risk aversion, impulse responses |
| JEL: | G12 E43 E44 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:1107&r=upt |