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on Utility Models and Prospect Theory |
| By: | Dominique Gu/'egan; Wayne Tarrant |
| Abstract: | Regulation and risk management in banks depend on underlying risk measures. In general this is the only purpose that is seen for risk measures. In this paper we suggest that the reporting of risk measures can be used to determine the loss distribution function for a financial entity. We demonstrate that a lack of sufficient information can lead to ambiguous risk situations. We give examples, showing the need for the reporting of multiple risk measures in order to determine a bank's loss distribution. We conclude by suggesting a regulatory requirement of multiple risk measures being reported by banks, giving specific recommendations. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1111.4417&r=upt |
| By: | Agustin Roitman |
| Abstract: | A common assumption in standard economic models is that agents are risk-averse and prudent, and it is often argued that prudence is necessary to generate precautionary savings. This paper shows that prudence is not necessary to generate precautionary savings in small open economy models with more than two periods. A new class of preferences, which enables the isolation of the effect of risk aversion on precautionary savings, is introduced. The effects of changes in risk aversion, interest rates, and persistence and volatility of shocks on average asset holdings are qualitatively identical to the ones observed for standard constant-elasticity-of-substitution preferences. These results show that the almost universal assertion in the literature - that only prudent consumers can generate positive levels of precautionary savings - is simply incorrect. |
| Keywords: | Borrowing , Forecasting models , Interest rates , Savings , |
| Date: | 2011–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/253&r=upt |
| By: | Suen, Richard M. H. |
| Abstract: | This paper examines the theoretical foundations of precautionary wealth accumulation in a multi-period model where consumers face uninsurable earnings risk and borrowing constraints. We begin by characterizing the consumption function of individual consumers. We show that consumption function is concave when the utility function has strictly positive third derivative and the inverse of absolute prudence is a concave function. These conditions encompass all HARA utility functions with strictly positive third derivative as special cases. We then show that when consumption function is concave, a mean-preserving spread in earnings risk would encourage wealth accumulation at both the individual and aggregate levels. |
| Keywords: | Consumption function; borrowing constraints; precautionary saving |
| JEL: | D81 D91 E21 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34774&r=upt |
| By: | Andrea Leuermann; Sarah Necker |
| Abstract: | This study investigates whether the willingness to take income risks revealed by occupational choice is transmitted from parents to their children. Using data from the German Socio-Economic Panel (SOEP), we find that fathers' riskiness of job is a significant determinant of children's occupational risk, in particular sons' (excluding parent-child pairs with identical occupations). This is the first piece of evidence for intergenerational transmission of risk attitudes relying on real world behavior. It shows that not only individuals' own assessments of their risk attitudes correlate (found by previous studies) but also risk preferences shown in exactly the same situation. |
| Keywords: | Risk preferences, intergenerational transmission, occupational choice |
| JEL: | D12 D81 J24 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp412&r=upt |
| By: | Patrick MOYES (GREThA, CNRS, UMR 5113); Nicolas GRAVEL (Aix-Marseille University and AMSE (GREQAM)) |
| Abstract: | We provide foundations for robust normative evaluation of distributions of two attributes,\r\none of which is cardinally measurable and transferable between individuals and the other is\r\nordinal and non-transferable. The result that we establish takes the form of an analogue to the standard Hardy, Littlewood, and Pólya (1934) theorem for distributions of one cardinal\r\nattribute. More specifically, we identify the transformations of the distributions which\r\nguarantee that social welfare increases according to utilitarian unanimity provided that the utility function is concave in the cardinal attribute and that its marginal utility with respect to the same attribute is non-increasing in the ordinal attribute. We establish that this\r\nunanimity ranking of the distributions is equivalent to the Bourguignon (1989) ordered\r\npoverty gap quasi-ordering. Finally, we show that, if one distribution dominates another\r\naccording to the ordered poverty gap criterion, then the former can be derived from the latter by means of an appropriate and finite sequence of such transformations |
| Keywords: | Normative Analysis, Utilitarianism, Bidimensional Stochastic Dominance,Inequality Reducing Transformations |
| JEL: | D31 D63 I32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2011-36&r=upt |
| By: | Faro, José Heleno |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_258&r=upt |