|
on Utility Models and Prospect Theory |
| By: | Thomas Breuer; Imre Csiszar |
| Abstract: | We propose to interpret distribution model risk as sensitivity of expected loss to changes in the risk factor distribution, and to measure the distribution model risk of a portfolio by the maximum expected loss over a set of plausible distributions defined in terms of some divergence from an estimated distribution. The divergence may be relative entropy, a Bregman distance, or an $f$-divergence. We give formulas for the calculation of distribution model risk and explicitly determine the worst case distribution from the set of plausible distributions. We also give formulas for the evaluation of divergence preferences describing ambiguity averse decision makers. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.4832&r=upt |
| By: | Larry G. Epstein; Shaolin Ji |
| Abstract: | This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging arguments. Ambiguous volatility implies market incompleteness that rules out perfect hedging. Consequently, hedging arguments determine prices only up to intervals. However, sharper predictions can be obtained by assuming preference maximization and equilibrium. Thus we apply the model of utility to a representative agent endowment economy to study equilibrium asset returns. A version of the C-CAPM is derived and the effects of ambiguous volatility are described. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.4614&r=upt |
| By: | Guo, Xu; Wong, Wing-Keung; Zhu, Lixing |
| Abstract: | This paper studies the impact of background risk on the indifference curve. We first study the shape of the indifference curves for the investment with background risk for risk averters, risk seekers, and risk-neutral investors. Thereafter, we study the comparative statics of the change in the shapes of the indifference curves when the means and the standard deviations of the returns of the financial asset and/or the background asset change. In addition, we draw inference on risk vulnerability and investment decisions in financial crises and bull and bear markets. |
| Keywords: | Mean-variance model; indifference curve; location-scale family; background risk; utility function; risk aversion; risk seeking |
| JEL: | G11 D81 C0 |
| Date: | 2013–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43864&r=upt |
| By: | Mare Sarr and Mintewab Bezabih |
| Abstract: | To the extent that diversifying income portfolio is used as a strategy for shielding against production risk, both individual risk preferences and weather uncertainty could affect crop diversification decisions. This paper is concerned with empirically assessing the effects of risk preferences and rainfall variability on farm level diversity. Unique panel data from Ethiopia consisting of experimentally generated risk preference measures combined with rainfall data are employed in the analysis. The major contribution of this study is its explicit treatment of individual risk preferences in the decision to diversify, simultaneously controlling for environmental risk in the form of rainfall variability. Covariate shocks from rainfall variability are found to positively contribute to an increased level of diversity with individual risk aversion having a positive but less significant role. We find that rainfall variability in spring has a greater effect than rainfall variability summer—the major rainy season. This finding is in line with similar agronomic-meteorological studies. These results imply that in situ biodiversity conservation could be effective in areas with high rainfall variability. However, reduction in risk aversion, which is associated with poverty reduction, is likely to reduce in situ conservation. |
| Keywords: | Crop diversity, Experimental risk preferences, Rainfall, Uncertainty |
| JEL: | Q57 Q56 C33 C35 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:322&r=upt |
| By: | Kosse, Fabian; Pfeiffer, Friedhelm |
| Abstract: | This study explores the intergenerational transmission of time preferences and focuses on the question which specific aspects of mother's time preference are related to her preschool child's ability to delay gratification. We provide a new procedure for assessing the parameters of a 'quasi-hyperbolic' discount function (Laibson, 1997) using two trade-off experiments. We apply the procedure to a sample of 213 mother-child pairs and show that especially mother's beta parameter is related to her preschool child's ability to delay gratification. -- |
| Keywords: | Intergenerational Transmission,Time Preference,Quasi-Hyperbolic Discounting,Preschool Children |
| JEL: | D90 D10 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13002&r=upt |
| By: | Aylit Tina Romm |
| Abstract: | In this paper we demonstrate that the magnitude of the reaction of saving behavior to a change in the anticipated retirement date is largely determined by the degree to which utility is additively separable in consumption and leisure. We show that the relative decrease in saving in response to a later anticipated retirement date is larger when preferences are non-separable in consumption and leisure, and the cross-derivative of the utility function is negative, than when preferences are separable. In particular, based on our simulations, the short term decrease in aggregate pre-retirement saving in response to a later anticipated retirement date may be up to 61.5% in the non-separable case as against 31% in the separable case. In the long-term , the decrease in pre-retirement saving would be as much as 28.5% in the non-separable case, as against 16.5% in the separable case. |
| Keywords: | Non-separable preferences; retirement date; saving |
| JEL: | D91 J26 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:323&r=upt |
| By: | Dorje C. Brody; Lane P. Hughston |
| Abstract: | When investors have heterogeneous attitudes towards risk, it is reasonable to assume that each investor has a pricing kernel, and that these individual pricing kernels are in some way aggregated to form a market pricing kernel. The various investors are then buyers or sellers depending on how their individual pricing kernels compare to that of the market. In the case of geometric Brownian motion based models, we can represent such heterogeneous attitudes by letting the market price of risk be a random variable, the distribution of which corresponds to the variability of attitude across the market. If the flow of market information is determined by the movements of the prices of assets, then neither the Brownian driver nor the market price of risk are directly visible: the filtration is generated by an "information process" given by a combination of the two that takes the form of a Brownian motion with random drift. We show that the market pricing kernel is then given by the harmonic mean of the individual pricing kernels associated with the various market participants. Alternatively, one can view the market pricing kernel as the inverse of a "benchmark" or "natural numeraire" asset, and in that case the benchmark asset is the portfolio obtained by aggregating the benchmarks assigned by the individual investors based on their private risk preferences. Remarkably, with an appropriate definition of L\'evy information one draws the same conclusion in the case of a geometric L\'evy model in which asset prices can jump. As a consequence one is lead to a rather general scheme for the management of investments in heterogeneous markets subject to jump risk. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.2964&r=upt |
| By: | Nathalie Picard; André de Palma; Ignacio A. Inoa (THEMA, Universite de Cergy-Pontoise and THEMA; ENS Cachan; THEMA, Universite de Cergy-Pontoise and THEMA) |
| Abstract: | There is still a long way to achieve the goal of providing a theoretical and empirical framework to model and apply economics of the family. Decision-making within the family has been neglected too long in transportation. Two special issues by Bhat and Pendyala, 2005 [15] and by Timmermans and Junyi Zhang, 2009 [76] provide the most notable exceptions. The objective of this paper is to set-up a flexible framework to discuss the development of integrated transportation models involving interacting and interdependent actors; updating previous reviews from the point of view of economics of the family . Transportation is very keen to have access to this type of models, since their applications are numerous. Let mention, for example, residential location choice, workplace choice, car ownership, choice of children’s school, mode choice, departure time choice activity patterns and the like. The (non unitary) economics of the family models are totally different models, which do not merely extend existing discrete choice models. They introduce new concepts, which are specific to within family interactions: negotiation, altruism, or repeated interaction and Pareto optimality. This review is completed with the study of different types of accessibility measures including recent work on time-geography measures of accessibility. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2013-03&r=upt |
| By: | Dilip Madan; Martijn Pistorius; Mitja Stadje |
| Abstract: | A distorted expectation is a Choquet expectation with respect to the capacity induced by a concave probability distortion. Distorted expectations are encountered in various static settings, in risk theory, mathematical finance and mathematical economics. There are a number of different ways to extend a distorted expectation to a multi-period setting, which are not all time-consistent. One time-consistent extension is to define the non-linear expectation by backward recursion, applying the distorted expectation stepwise, over single periods. In a multinomial random walk model we show that this non-linear expectation is stable when the number of intermediate periods increases to infinity: Under a suitable scaling of the probability distortions and provided that the tick-size and time step-size converge to zero in such a way that the multinomial random walks converge to a Levy process, we show that values of random variables under the multi-period distorted expectations converge to the values under a continuous-time non-linear expectation operator, which may be identified with a certain type of Peng's g-expectation. A coupling argument is given to show that this operator reduces to a classical linear expectation when restricted to the set of pathwise increasing claims. Our results also show that a certain class of g-expectations driven by a Brownian motion and a Poisson random measure may be computed numerically by recursively defined distorted expectations. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.3531&r=upt |