nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒12‒20
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Ambiguity Aversion and Stock Market Participation: Evidence from Fund Flows By : Constantinos Antoniou; : Richard D.F. Harris; : Ruogu Zhang
  2. On the Market Viability under Proportional Transaction Costs By Erhan Bayraktar; Xiang Yu
  3. The Excess Returns Puzzle in Currency Markets: Clues on Moving Forward By Josh Stillwagon
  4. Does Anticipated Regret Really Matter? Revisiting the Role of Feedback in Auction Bidding By Peter Katuscak; Fabio Michelucci; Miroslav Zajicek
  5. Reference Points, Performance and Ability: A Real Effort Experiment on Framed Incentive Schemes By Katharina Hilken; Stephanie Rosenkranz; Kris De Jaegher; Marc Jegers
  6. Inference Based on SVARs Identied with Sign and Zero Restrictions.Theory and Applications By Jonas E. Arias; Juan F. Rubio-Ramirez; Daniel F. Waggoner
  7. Fluctuations in Uncertainty By Nicholas Bloom
  8. Sovereign bond risk premiums By Dockner, Engelbert J.; Mayer, Manuel; Zechner, Josef

  1. By: : Constantinos Antoniou; : Richard D.F. Harris; : Ruogu Zhang
    Date: 2013
  2. By: Erhan Bayraktar; Xiang Yu
    Abstract: We consider a notion of weak no arbitrage condition commonly known as Robust No Unbounded Profit with Bounded Risk (RNUPBR) in the context of continuous time markets with small proportional transaction costs. We show that the RNUPBR condition on terminal liquidation value holds if and only if there exists a strictly consistent local martingale system (SCLMS). Moreover, we show that RNUPBR condition implies the existence of optimal solution of the utility maximization problem defined on the terminal liquidation value.
    Date: 2013–12
  3. By: Josh Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper is designed to review the empirical literature on the excess returns puzzle: the difficulty encountered by standard risk premium models in accounting for relative returns in the foreign exchange market. Of particular interest are the studies using survey data to decompose ex post excess returns into an expected component - the risk premium - and a forecast error. On the whole, these studies have found evidence of violations of the rational expectations hypothesis (non-white noise forecast errors), and a time-varying risk premium. This suggests the need for an alternative specification of forecasting. The literature has left open however the question of whether the traditional models can account for movements in the premium as measured by survey. Although the traditional models have not been tested against survey data, there is reason from the outset to believe EUT provides a deficient foundation for a model of the risk premium. Experimental evidence is discussed showing that the predictions of EUT are grossly inconsistent with the behavior of actual subjects towards risky gambles. Lastly, the paper discusses alternative models of risk preferences drawing from the experimental findings on prospect theory, and ways in which their testing can be improved through use of the I(2) Cointegrated VAR model.
    Keywords: Excess returns puzzle, survey data, prospect theory, cointegration
    JEL: F31 G02 G15
    Date: 2013–12
  4. By: Peter Katuscak; Fabio Michelucci; Miroslav Zajicek
    Abstract: Does the type of post-auction feedback affect bidding behavior in first price auctions? Filiz- Ozbay and Ozbay (2007) find that such manipulation can increase bids in a one-shot auction. They explain this as an effect of anticipated regret combined with the assumption that feedback directly affects salience of regret relative to material payoff. We revisit this important market design issue using four different auction protocols and a large sample of subjects. We do not find any systematic effect of feedback on the average bid/value ratio. This evidence indicates either the lack of anticipated regret or its manipulability by feedback in one-shot auctions.
    Keywords: auctions; bidding; feedback; regret;
    JEL: C91 C92 D44
    Date: 2013–06
  5. By: Katharina Hilken; Stephanie Rosenkranz; Kris De Jaegher; Marc Jegers
    Abstract: The paper investigates the effect of four differently framed payment contracts on the agent's effort provision and performance in a real effort experiment. The four incentive payments are framed as a base wage and bonuses (one immediately pays bonuses, the other only after an initial performance-independent part), penalties or a combination of bonuses and penalties. The base wage that is offered, induces the reference point. The participants provide real effort and are paid for finding pairs in a customized Memory game. The bonus-only frame elicits the highest effort, whereas frames with penalties lag behind. Ability positively complements the effect of effort on performance. The combination of penalties and bonuses minimises the costs of the principal only for low levels of performance employing heterogeneous agents. For higher performance levels, framing a base wage with bonuses is cost-effective.
    Keywords: Real Effort Experiment, Optimal Payment Scheme, Principal-Agent Relationship, Ability, Bonus, Penalty
    JEL: M52 J33 C91
    Date: 2013–11
  6. By: Jonas E. Arias; Juan F. Rubio-Ramirez; Daniel F. Waggoner
    Abstract: Are optimism shocks an important source of business cycle fluctuations? Are decit-nanced tax cuts better than decit-nanced spending to increase output? These questions have been previously studied using SVARs identied with sign and zero restrictions and the answers have been positive and denite in both cases. While the identication of SVARs with sign and zero restrictions is theoretically attractive because it allows the researcher to remain agnostic with respect to the responses of the key variables of interest, we show that current implementation of these techniques does not respect the agnosticism of the theory. These algorithms impose additional sign restrictions on variables that are seemingly unrestricted that bias the results and produce misleading condence intervals. We provide an alternative and ecient algorithm that does not introduce any additional sign restriction, hence preserving the agnosticism of the theory. Without the additional restrictions, it is hard to support the claim that either optimism shocks are an important source of business cycle fluctuations or decit-nanced tax cuts work best at improving output. Our algorithm is not only correct but also faster than current ones.
    Keywords: SVARs; Sign and Zero Restrictions; Optimism and Fiscal Shocks
    JEL: C10
    Date: 2013–12
  7. By: Nicholas Bloom
    Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.
    Keywords: Uncertainty, risk, volatility, investment
    JEL: E2 E3 O3 O4
    Date: 2013–12
  8. By: Dockner, Engelbert J.; Mayer, Manuel; Zechner, Josef
    Abstract: Credit risk has become an important factor driving government bond returns. We therefore introduce an asset pricing model which exploits information contained in both forward interest rates and forward CDS spreads. Our empirical analysis covers euro-zone countries with German government bonds as credit risk-free assets. We construct a market factor from the first three principal components of the German forward curve as well as a common and a country-specific credit factor from the principal components of the forward CDS curves. We find that predictability of risk premiums of sovereign euro-zone bonds improves substantially if the market factor is augmented by a common and an orthogonal country-specific credit factor. While the common credit factor is significant for most countries in the sample, the country-specific factor is significant mainly for peripheral euro-zone countries. Finally, we find that during the current crisis period, market and credit risk premiums of government bonds are negative over long subintervals, a finding that we attribute to the presence of financial repression in euro-zone countries. --
    Keywords: Sovereign bond risk premiums,Market and credit risk factors,Financial repression
    Date: 2013

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