
on Utility Models and Prospect Theory 
By:  Berliant, Marcus; Yu, ChiaMing 
Abstract:  Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fullyrevealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under appropriate modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer’s utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on the consumer’s location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. 
Keywords:  Urban Economics; General Equilibrium; Private Information; Rational Expectations 
JEL:  R13 D82 D51 
Date:  2012–03–05 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:37121&r=upt 
By:  Paolo Guasoni; Scott Robertson 
Abstract:  This paper develops a method to derive optimal portfolios and risk premia explicitly in a general diffusion model for an investor with power utility and a long horizon. The market has several risky assets and is potentially incomplete. Investment opportunities are driven by, and partially correlated with, state variables which follow an autonomous diffusion. The framework nests models of stochastic interest rates, return predictability, stochastic volatility and correlation risk. In models with several assets and a single state variable, longrun portfolios and risk premia admit explicit formulas up the solution of an ordinary differential equation which characterizes the principal eigenvalue of an elliptic operator. Multiple state variables lead to a quasilinear partial differential equation which is solvable for many models of interest. The paper derives the longrun optimal portfolio and the longrun optimal pricing measures depending on relative risk aversion, as well as their finitehorizon performance. 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1203.1399&r=upt 
By:  Thomas Knispel 
Abstract:  For a stochastic factor model we maximize the longterm growth rate of robust expected power utility with parameter $\lambda\in(0,1)$. Using duality methods the problem is reformulated as an infinite time horizon, risksensitive control problem. Our results characterize the optimal growth rate, an optimal longterm trading strategy and an asymptotic worstcase model in terms of an ergodic Bellman equation. With these results we propose a duality approach to a "robust large deviations" criterion for optimal longterm investment. 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1203.1191&r=upt 
By:  He, Junnan 
Abstract:  This paper is concerned with the axiomatic foundation of the revealed preference theory. Many wellknown results in literature rest upon the ability to choose over budget sets that contains only 2 or 3 elements, the situations which are not observable in real life. In order to give a more realistic approach, this paper shows that many of the famous consistency requirements, such as those proposed by Arrow, Sen, Samuelson etc., are equivalent if the domain of choice functions satisfy some set theoretical properties. And these properties, unions and inclusions for example, are proposed in a way that gives observability. 
Keywords:  Revealed Preference Theory; Rationality; Ordering; Preference; Choice function 
JEL:  D11 D01 
Date:  2011–11–10 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:37094&r=upt 
By:  Pierdzioch, Christian; Rülke, JanChristoph; Stadtmann, Georg 
Abstract:  Based on the approach advanced by Elliott et al. (Rev. Ec. Studies. 72, 11971125), we found that the loss function of a sample of oil price forecasters is asymmetric in the forecast error. Our findings indicate that the loss oil price forecasters incurred when their forecasts exceeded the price of oil tended to be larger than the loss they incurred when their forecast fell short of the price of oil. Accounting for the asymmetry of the loss function does not necessarily make forecasts look rational.  
Keywords:  oil price,forecasting,loss function,rationality of forecasts 
JEL:  F31 D84 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:zbw:euvwdp:314&r=upt 
By:  Andersson, Henrik; Hammitt, James; Lindberg, Gunnar; Sundström, Kristian 
Abstract:  Stated preference (SP) surveys attempt to obtain monetary values for nonmarket goods that reflect individuals’ “true” preferences. Numerous empirical studies suggest that monetary values from SP studies are sensitive to survey design and so may not reflect respondents’ true preferences. This study examines the effect of time framing on respondents’ willingness to pay (WTP) for car safety.We explore how WTP per unit risk reduction depends on the time period over which respondents pay and face reduced risk in a theoretical model and by using data from a Swedish contingent valuation survey. We find that WTP is sensitive to time framing; the theoretical model predicts that the effect is likely to be nontrivial, and empirical estimates from an annual scenario are about 70 percent higher than estimates from a monthly scenario. 
Keywords:  Car safety, Contingent valuation, Time frame, Willingness to pay 
JEL:  C52 D6 I1 Q50 
Date:  2011–10 
URL:  http://d.repec.org/n?u=RePEc:tse:wpaper:25460&r=upt 
By:  Bianca De Paoli; Pawel Zabczyk 
Abstract:  This paper analyzes the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households' propensity to save. It uses a NewKeynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive  i.e. `lean against the wind'  following positive shocks. Since the size of these `riskadjustments' is increasing in the degree of macroeconomic volatility, ignoring this channel could lead to larger policy errors in turbulent times  with good luck translating into good policy. 
Keywords:  precautionary saving, monetary policy, cyclical risk aversion, macrofinance, nonlinearities 
JEL:  E32 G12 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:cep:cepdps:dp1132&r=upt 
By:  Martin Forster; Davide La Torre; Peter Lambert 
Abstract:  We consider the optimal control of inequality under uncertainty, with a particular focus on income inequality. For an economy experiencing economic growth and random shocks, we show how a simple loss and `bequest' function may be combined to guide the expected level of inequality towards a predefined target within a finite planning horizon. Closed form solutions show that, the stronger the shocks to the income distribution, the more aggressive is policy. We discuss the results in the context of recent applied and policy literature on social inequality, globalisation and economic instability. 
Keywords:  Globalisation; Inequality; Stochastic dynamic programming 
JEL:  C61 D31 D63 I38 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:yor:yorken:12/07&r=upt 