nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒12‒12
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Uncertainty and Natural Resources - Prudence Facing Doomsday By Johannes Emmerling
  2. Filtering problem for general modeling of the drift and application to portfolio optimization problems. By Dalia Ibrahim; Frédéric Abergel
  3. Sparse Mean-Variance Portfolios: A Penalized Utility Approach By David Puelz; P. Richard Hahn; Carlos M. Carvalho
  4. Decision Frameworks and the Investment in R&D By Erin Baker; Olaitan Olaleye; Lara Aleluia Reis
  5. Financial market models in discrete time beyond the concave case By Mario Sikic
  6. Generalized asset pricing: Expected Downside Risk-Based Equilibrium Modelling By Mihaly Ormos; Dusan Timotity
  7. Demand for Secondhand Goods and Consumers' Preference in Developing Countries: An analysis using the field experimental data of Vietnamese consumers By HIGASHIDA Keisaku; Nguyen Ngoc MAI
  8. On the additivity of preference aggregation methods By Csató, László

  1. By: Johannes Emmerling (Fondazione Eni Enrico Mattei (FEEM) and Euro-Mediterranean Center on Climate Change (CMCC))
    Abstract: This paper studies the optimal extraction of a non-renewable resource under uncertainty using a discrete-time approach in the spirit of the literature on precautionary savings. We find that boundedness of the utility function, in particular the assumption about U(0), gives very different results in the two settings which are often considered as equivalent. For a bounded utility function, we show that in a standard two-period setting, prudence is no longer sufficient to ensure a more conservationist extraction policy than under certainty. If on the other hand we increase the number of periods to infinity, we find that prudence is not anymore not anymore necessary to induce a more conservationist extraction policy and risk aversion is sufficient. These results highlight the importance of the specification of the utility function and its behavior at the point of origin.
    Keywords: Expected Utility, Non-Renewable Resource, Prudence, Uncertainty
    JEL: Q30 D81
    Date: 2015–05
  2. By: Dalia Ibrahim (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris); Frédéric Abergel (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris)
    Abstract: We study the filtering problem and the maximization problem of expected utility from terminal wealth in a partial information context. The special features is that the only information available to the investor is the vector of sock prices. The mean rate of return processes are not directly observed and supposed to be driven by a process $\mu_{t}$ modeled by a stochastic differential equations. The main result in this paper is to show under which assumptions on the coefficients of the model, we can estimate the unobserved market price of risks. Using the innovation approach, we show that under globally Lipschitz conditions on the coefficients of $\mu_{t}$, the filters estimate of the risks satisfy a measure-valued Kushner-Stratonovich equations. On the other hand, using the pathwise density approach, we show that under a nondegenerate assumption and some regularity assumptions on the coefficients of $\mu_{t}$, the density of the conditional distribution of $\mu_{t}$ given the observation data, can be expressed in terms of the solution to a linear parabolic partial differential equation parameterized by the observation path. Also, we can obtain an explicit formulae for the optimal wealth, the optimal portfolio and the value function for the cases of logarithmic and power utility function.
    Keywords: Partial information,filtering problem,Kushner-stratonovich equation,pathwise density approach,martingale duality method,utility maximization.
    Date: 2015–11–30
  3. By: David Puelz; P. Richard Hahn; Carlos M. Carvalho
    Abstract: This paper considers mean-variance optimization under uncertainty, specifically when one desires a sparsified set of optimal portfolio weights. From the standpoint of a Bayesian investor, our approach produces a small portfolio from many potential assets while acknowledging uncertainty in asset returns and parameter estimates. Our loss function used for selection is constructed by integrating over both dimensions of uncertainty, and our optimization is structured as a LASSO minimization with penalized weights. The foundations of this paper are adapted from the decoupled shrinkage and selection (DSS) procedure of Hahn and Carvalho (2015) where statistical inference and the investor's preference for simplicity are separated.
    Date: 2015–12
  4. By: Erin Baker (Department of Mechanical and Industrial Engineering, College of Engineering, University of Massachusetts, Amherst, MA); Olaitan Olaleye (Department of Mechanical and Industrial Engineering, College of Engineering, University of Massachusetts, Amherst, MA); Lara Aleluia Reis (Centro Euro-Mediterraneo per i Cambiamenti Climatici, Fondazione Eni Enrico Mattei (FEEM))
    Abstract: In this paper we provide an overview of decision frameworks aimed at crafting an energy technology Research & Development portfolio, based on the results of three large expert elicitation studies and a large scale energy-economic model. We introduce importance sampling as a technique for integrating elicitation data and large IAMs into decision making under uncertainty models. We show that it is important to include both parts of this equation – the prospects for technological advancement and the interactions of the technologies in and with the economy. We find that investment in energy technology R&D is important even in the absence of climate policy. We illustrate the value of considering dynamic two-stage sequential decision models under uncertainty for identifying alternatives with option value. Finally, we consider two frameworks that incorporate ambiguity aversion. We suggest that these results may be best used to guide future research aimed at improving the set of elicitation data.
    Keywords: Decision Making Under Uncertainty, Climate Change, Stabilization Pathways, Energy technology, Ambiguity Aversion
    JEL: Q42
    Date: 2015–05
  5. By: Mario Sikic
    Abstract: In this article we propose a study of market models starting from a set of axioms, as one does in the case of risk measures. We define a market model simply as a mapping from the set of adapted strategies to the set of random variables describing the outcome of trading. We do not make any concavity assumptions. The first result is that under sequential upper-semicontinuity the market model can be represented as a normal integrand. We then extend the concept of no-arbitrage to this setup and study its consequences as the super-hedging theorem and utility maximization. Finally, we show how to extend the concepts and results to the case of vector-valued market models, an example of which is the Kabanov model of currency markets.
    Date: 2015–12
  6. By: Mihaly Ormos; Dusan Timotity
    Abstract: We introduce an equilibrium asset pricing model, which we build on the relationship between a novel risk measure, the Expected Downside Risk (EDR) and the expected return. On the one hand, our proposed risk measure uses a nonparametric approach that allows us to get rid of any assumption on the distribution of returns. On the other hand, our asset pricing model is based on loss-averse investors of Prospect Theory, through which we implement the risk-seeking behaviour of investors in a dynamic setting. By including EDR in our proposed model unrealistic assumptions of commonly used equilibrium models - such as the exclusion of risk-seeking or price-maker investors and the assumption of unlimited leverage opportunity for a unique interest rate - can be omitted. Therefore, we argue that based on more realistic assumptions our model is able to describe equilibrium expected returns with higher accuracy, which we support by empirical evidence as well.
    Date: 2015–12
  7. By: HIGASHIDA Keisaku; Nguyen Ngoc MAI
    Abstract: Using the data from a series of field experiments that were carried out in in Hanoi, Thai Ping, and Thai Hong in Vietnam, we examined the relationship between consumers' preference for secondhand products and consumers' and products' attributes. In particular, we extracted their risk, time, and social cooperative preferences through the experiments. In addition, we surveyed their personal attributes and conducted a type of conjoint questionnaire about motorbikes and fridges. Regarding product attributes, we focused on the age, brand, size, quality labeling, origin, and so on. We found that product attributes influence consumer utility as expected. For example, the Honda brand positively influences consumer utility. Moreover, we obtained several important results about the relationship between personal attributes and demand, in particular, about preference for secondhand products. For example, consumers who are more far-sighted and/or older have stronger preference for secondhand goods compared with the less far-sighted and/or younger consumers; the older and/or male consumers have stronger preference for Japanese brands as compared with the younger and/or female consumers. It is also possible that environmental consciousness affects the preference for secondhand products. We also provide policy implications on quality certification and international trade of secondhand goods.
    Date: 2015–12
  8. By: Csató, László
    Abstract: The paper reviews some axioms of additivity concerning ranking methods used for generalized tournaments with possible missing values and multiple comparisons. It is shown that one of the most natural properties, called consistency, has strong links to independence of irrelevant comparisons, an axiom judged unfavourable when players have different opponents. Therefore some directions of weakening consistency are suggested, and several ranking methods, the score, generalized row sum and least squares as well as fair bets and its two variants (one of them entirely new) are analysed whether they satisfy the properties discussed. It turns out that least squares and generalized row sum with an appropriate parameter choice preserve the relative ranking of two objects if the ranking problems added have the same comparison structure.
    Keywords: preference aggregation, tournament ranking, paired comparison, additivity, axiomatic approach
    JEL: D71
    Date: 2015–11–30

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