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on Utility Models and Prospect Theory |
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Issue of 2019‒09‒23
23 papers chosen by |
| By: | Salmeron Garrido, Jose Antonio; D'Auria, Bernardo |
| Abstract: | Within the well-known framework of financial portfolio optimization, we analyze the existing relationships between the condition of arbitrage and the utility maximization in presence of insider information. That is, we assume that, since the initial time, the information flow is altered by adding the knowledge of an additional random variable including future information. In this context we study the utility maximization problem under the logarithmic and the Constant Relative Risk Aversion (CRRA) utilities, with and without the restriction of no temporarybankruptcy. For the latter case we obtain an optimal strategy different from the one computed in [1]. We give various examples for which the insider information create arbitrage, and for which the logarithmic maximization problem is bounded or unbounded. We conclude with an interesting result, showing that the insider information may not lead to any arbitrage. |
| Keywords: | Equivalent Martingale Measure; No Free Lunch Vanishing Risk; Arbitrage; Value Of The Information; Enlargement Of Filtration; Optimal Portfolio |
| Date: | 2019–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:28805&r=all |
| By: | Heller, Yuval; Schreiber, Amnon |
| Abstract: | We study various decision problems regarding short-term investments in risky assets whose returns evolve continuously in time. We show that in each problem, all risk-averse decision makers have the same (problem-dependent) ranking over short-term risky assets. Moreover, in each of these problems, the ranking is represented by the same risk index as in the case of CARA utility agents and normally distributed risky assets. |
| Keywords: | Indices of riskiness, risk aversion, local risk, Wiener process. |
| JEL: | D81 G32 |
| Date: | 2019–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95791&r=all |
| By: | Burkhard C. Schipper (Department of Economics, University of California Davis) |
| Abstract: | We provide an evolutionary foundation to evidence that in some situations humans maintain either optimistic or pessimistic attitudes towards uncertainty and are ignorant to relevant aspects of the environment. Players in strategic games face Knightian uncertainty about opponents' actions and maximize individually their Choquet expected utility with respect to neo-additive capacities (Chateauneuf, Eichberger, and Grant, 2007) allowing for both an optimistic or pessimistic attitude towards uncertainty as well as ignorance to strategic dependencies. An optimist (resp. pessimist) overweights good (resp. bad) outcomes. A complete ignorant never reacts to opponents' changes of actions. With qualifications we show that in finite populations optimistic (resp. pessimistic) complete ignorance is evolutionary stable and yields a strategic advantage in submodular (resp. supermodular) games with aggregate externalities. Moreover, this evolutionary stable preference leads to Walrasian behavior in these classes of games. |
| Keywords: | ambiguity, Knightian uncertainty, Choquet expected utility, neo-additive capacity, Hurwicz criterion, Maximin, Minimax, supermodularity, aggregative games, monotone comparative statics, playing the field, evolution of preferences |
| JEL: | C72 C73 D01 D43 D81 L13 |
| Date: | 2019–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:334&r=all |
| By: | Anwesha Banerjee (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.); Nicolas Gravel (Centre de Sciences Humaines, 2, Dr APJ Abdul Kalam Road, 11 0011 Delhi, India. & Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE) |
| Abstract: | This paper examines how voluntary contributions to a public good are affected by the contributors' heterogeneity in beliefs about the uncertain impact of their contributions. It assumes that contributors have Savagian preferences that are represented by a two-state-dependent expected utility function and different beliefs about the benefit that will result from the sum of their contributions. We establish general comparative statics results regarding the effect of specific changes in the distribution of beliefs on the (unique) Nash equilibrium provision of the public good, under certain conditions imposed on the preferences. We specifically show that the equilibrium public good provision is increasing with respect to both first and second order stochastic dominance changes in the distribution of beliefs. Hence, increasing the contributors' optimism about the uncertain benefit of their contributions increases aggregate public good provision provision, as does any homogenization of these beliefs around their mean. |
| Keywords: | voluntary provision, public good, uncertainty, beliefs, optimism, consensus |
| JEL: | C72 H41 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1923&r=all |
| By: | Joseph Haslag (University of Missouri-Columbia) |
| Abstract: | Central bank communications need interpretation. We contribute to the communications literature by focusing on the effort expended on deciphering central bank communications. We build a model economy in which banks provide a deposit/insurance function for consumers subject to idiosyncratic liquidity shocks. Though ex ante identical, banks exhibit ex post heterogeneity by choosing different predictors that vary in terms of accuracy with respect to the expected future return on money. In the literature with heterogeneous forecasts, the modelling approach has relied on stochastic costs as the primary force accounting for the coexistence of different predictors in equilibrium. Here, model the problem as a willingness to pay for different predictors; each predictor has a different forecast accuracy with more accurate predictors resulting in higher expected utility. By the concavity of the consumer’s utility function, there exists a willingness-to-pay which satisfies an indifference condition. More accurate forecast predictors correspond with greater willingness-to-pay amounts. The resources expended to obtain a more accurate forecast correspond with the bank’s processing of the central bank’s communications. Hence, we interpret the willingness to pay as Fed watching. The model with Fed watching exhibits local stability, while we derive conditions in which no Fed watching results in local instability. We further apply this approach to a banking economy in which the returns to one asset are subject to a fractional externality; that is, the return to one asset is negatively related to the fraction of banks holding that asset. The approach is designed to capture how herding and the regulatory settings are related to what the central bank knows (and communicates) about bank operations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:415&r=all |
| By: | Benoît, Jean-Pierre; Dubra, Juan; Romagnoli, Giorgia |
| Abstract: | Incentive compatible mechanisms for eliciting beliefs typically presume that money is the only argument in people's utility functions. However, subjects may also have non-monetary objectives that confound the mechanisms. In particular, psychologists have argued that people favour bets where their skill is involved over equivalent random bets -- a so-called preference for control. We propose a new belief elicitation method which mitigates the control preference. With the help of this method, we find that under the ostensibly incentive compatible probability matching mechanism (Grether (1981) and Karni (2009)), subjects report beliefs 7% higher than their true beliefs in order to increase their control. Non-monetary objectives account for at least 27% of what would normally be measured as overconfidence. Our paper also contributes to a refined understanding of control. |
| Keywords: | Elicitation, Overconfidence, Control. Experimental Methods |
| JEL: | D0 D01 D03 |
| Date: | 2019–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95550&r=all |
| By: | Berliant, Marcus; Thakur, Sounak |
| Abstract: | The set of stable marriage matches is different depending on whether allocation within marriage is determined by binding agreements in the marriage market (BAMM) or by bargaining in marriage (BIM). With transferable utility, any stable matching is utilitarian efficient under BAMM, but not under BIM. Is it possible to implement the efficient matching under BIM? We show that if one side of the market is sufficiently sensitive relative to the other, if the more sensitive side can be ranked by sensitivity, and if their preferences are hierarchical, the top trading cycles algorithm results in an efficient matching. |
| Keywords: | Two-sided matching; Marriage; Bargaining |
| JEL: | C78 D1 J12 |
| Date: | 2019–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96001&r=all |
| By: | Ali Shourideh (Carnegie Mellon University) |
| Abstract: | Recent evidence, as illustrated by Chetty et al. (2014), has established that individuals differ in terms of the degree to which they pay attention to retirement saving. In particular as argued, since some savers are passive, i.e., not attentive to government’s retirement subsidies, policies that directly target saving quantities such as default enrollment can be beneficial. Inspired by this evidence, I study optimal government policy in a model in which individuals are rationally inattentive to government policies and their (future) preferences. To do so, I consider an individual who solves an information design problem by acquiring information about their preferences and government policies before making their choices: as in Sims (2003), Matějka and McKay (2015) and Caplin and Dean (2015). To acquire information, individuals pay a utility cost which depends on an appropriate notion of the distance between their prior and posterior. This information acquisition creates a feedback effect whereby government policies depend on individuals’ choices and information while individuals’ information choice depends on their expectation of government’s policies. I show that the nature of the individuals cost of information acquisition critically impacts the policy chosen by the government. In particular, when the cost of in- formation acquisition is such that individuals cannot distinguish between small changes in government policy and their prior, then optimal policies depart from standard behavioral models of limited attention such as Farhi and Gabaix (2015). Furthermore, I study an extension of the model that allows for heterogeneity in attention cost across individual. Optimal policies then prescribe how to target passive versus active decision makers, i.e., those with high and low attention costs. I provide formulas that characterize the optimal mix of tax/subsidies as well as defaults and quantity targets. Finally, I apply this framework to optimal design of public pensions and retirement incentives. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1335&r=all |
| By: | Li, Fanghui; Wang, Gaowang |
| Abstract: | The paper examines the famous Chamley-Judd zero capital tax theorem in model economies where agents care about their social status. We show that the limiting capital income tax is not zero in general and its sign depends only on the utility specifications. Our conclusion is robust to several important extensions: the model with multiple physical capitals, the model with both human and physical capitals, and the one with heterogeneous agents. |
| Keywords: | Demand for Status; Capital Income Tax; Human Capital; Heterogeneous Agents |
| JEL: | H21 H24 |
| Date: | 2019–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96076&r=all |
| By: | Stefan Nagel (University of Chicago); Zhengyang Xu (University of Michigan) |
| Abstract: | Building on recent evidence that lifetime experiences shape individuals’ macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory from experienced endowment growth. The agent updates subjective beliefs with constant gain, which in- duces memory loss, but is otherwise Bayesian in evaluating uncertainty. The model produces perpetual learning, substantial priced long-run growth rate uncertainty, and, conveniently, a stationary economy. This approach resolves many asset pricing puzzles and it reconciles model-implied subjective belief dynamics with survey data on individual investor return expectations within a simple setting with IID endowment growth, constant risk aversion, and a gain parameter calibrated to microdata estimates. The objective equity premium is high and strongly counter-cyclical in the sense of being negatively related to experienced stock market payout growth (a long-run weighted average of past growth rates). In contrast, the subjective equity premium is slightly pro-cyclical. As a consequence, subjective expectations errors are predictable and negatively related to past experienced payout growth. Consistent with this theory, we show empirically that experienced payout growth is negatively related to future stock market excess returns. Based on expectations data from individual investor surveys spanning several decades, we show that this measure of experienced growth is also strongly negatively related to subjective expectations errors. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:71&r=all |
| By: | Alet Roux; Zhikang Xu |
| Abstract: | We consider indifference pricing of contingent claims consisting of payment flows in a discrete time model with proportional transaction costs and under exponential disutility. This setting covers utility maximisation as a special case. A dual representation is obtained for the associated disutility minimisation problem, together with a dynamic procedure for solving it. This leads to an efficient and convergent numerical procedure for indifference pricing which applies to a wide range of payoffs, a large range of time steps and all magnitudes of transaction costs. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.06260&r=all |
| By: | Encarnacion Algaba (Seville University); Rene van den Brink (Vrije Universiteit Amsterdam) |
| Abstract: | In this paper we focus on restrictions arising from the players belonging to some hierarchical structure that is represented by a digraph. Two of these models are the games with a permission structure and games under precedence constraints. In both cases, the hierarchy can be represented by a directed graph which restricts the possibilities of coalition formation. These two approaches led to two different type of solutions in the literature. The precedence power solutions for games under precedence constraints, are axiomatized with an axiom that applies a network power measure to the precedence constraint. We will show that something similar can be done for games with a permission structure, and obtain a class of permission power solutions. This class contains the (conjunctive) permission value. With this we have two classes of solutions for games with a hierarchy, one based on permission structures and another based on precedence constraints, that are characterized by similar axioms. Moreover, the solutions are linked with network power measures. |
| Keywords: | Cooperative transferable utility game, permission structures, precedence constraints, Shapley value, hierarchical solution, power measures |
| JEL: | C71 |
| Date: | 2019–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190064&r=all |
| By: | Matthieu Gilson |
| Abstract: | My thesis focuses on the risk-taking behavior of financial agents, aiming particularlyat better understanding how risk attitudes can change over time. It alsoexplores the implications that these changes have on financial markets, and on theeconomy as a whole.The first paper, which is a joint work with Kim Oosterlinck and Andrey Ukhov,studies how risk aversion of financial markets’ participants is affected by the SecondWorld War. The literature links extreme events to changes in risk aversion but failsto find a consensus on the direction of this change. Moreover, due to data limitationsand difficulties in estimation of risk aversion, the speed of the change in risk aversionhas seldom been analyzed. This paper develops an original methodology to overcomethe latter limitation. To estimate changes in attitude toward risk, we rely on thedaily market prices of lottery bonds issued by Belgium. We provide evidence on thedynamic of risk attitude before, during and after the Second World War. We findsubstantial variations between 1938 and 1946. Risk aversion increased at the outbreakof the war, decreased dramatically during the occupation to increase again afterthe war. To our knowledge, this finding of reversal in risk attitude is unique in theliterature. We discuss several potential explanations to this pattern, namely changesin economic perspectives, mood, prospect theory, and background risk. While theymight all have played a role, we argue that habituation to background risk mostconsistently explains the observed behavior over the whole period. Living continuouslyexposed to war-related risks has gradually changed the risk-taking behavior ofinvestors.In the second paper, I derive a measure of risk aversion from asset prices andanalyze what are its main drivers. Given the complexity of eliciting risk aversionfrom asset prices, few papers provide empirical evidence on the dynamics of riskaversion in a long-term perspective. This paper tries to fill the gap. First, I providea measure of risk aversion that is original, both because of the length of its sampleperiod (1958- 1991) and the methodology used. I study the relationship betweenthis new measure of risk aversion and several key economic variables in a structuralvector autoregression. Results show that risk aversion varies over the period. Aworsening of economic conditions, a decrease in stock prices or a tighter monetarypolicy lead to an increase in risk aversion. On the other hand, an increase in riskaversion is linked to a larger corporate bond credit spread and has an adverse effecton stock prices.The third paper explores the impact of asset price bubbles on the riskiness offinancial institutions. I investigate the effect of a real estate boom on the financialstability of commercial banks in the United States using exogenous variations intheir exposure to real estate prices. I find that the direction of the effect dependson bank characteristics. Although higher real estate prices have a positive impacton bank stability on average, small banks and banks that operate in competitivebanking markets experience a negative effect. I reconcile these findings by providingevidence that higher real estate prices benefit commercial banks by raising the valueof collateral pledged by borrowers but at the cost of an increase in local bankingcompetition. This increase in competition affects banks that have a low marketpower more severely, which explains why small banks and banks facing a high degreeof competition display relatively lower stability during a real estate boom. |
| Keywords: | risk aversion; lottery; bonds; banking |
| Date: | 2019–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/292556&r=all |
| By: | Toshikuni Sato |
| Abstract: | This study proposes a threshold measurement model based on the prospect theory and zone of tolerance for the SELVQUAL scale to measure the latent perceived service quality The concept of zone of tolerance is where customers are willing to accept a service discrepancy within a standard they recognize. The discussion focuses on three stages of consumers' mental state and how they relate to observable perceived service quality It then proposes a model that employs a threshold specification representing extent limit as a zone of tolerance. Because the value function in prospect theory describes human perception's dependence on the evaluation of differences, rather than absolute magnitudes, the proposed mode also integrates asymmetric and nonlinear properties. Empirical analysis was implemented using the data collected from several different service sectors, and the proposal model showed better performance as against other competitive models. The results provide an insight into the asymmetric and nonlinear latent structures of consumers fperceived service quality Clustering was conducted by applying estim ated thresholds and factor scores to obtain three different kinds of consumer segments. |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:toh:dssraa:100&r=all |
| By: | Carsten Lausberg; Francois Viruly |
| Abstract: | Human decisions are context-dependent, for instance influenced by the availability of infor-mation. But they also depend on the character traits of the decision-maker, for instance the tendency to decide intuitively (based on emotions and affection) or deliberately (based on reasoning). Perhaps real estate development is a field, which is prone to intuitive behaviour because of the specific characteristics of this activity, which include lengthy time horizons, and the lack of information that often accompanies the development process. Surveys among developers have confirmed this, showing that intuition, creativity, instinct, and similar behavioural attributes are regarded as critical success factors in this sector of the market. However, that does not render market analysis, investment calculation and other rational fac-tors useless. The issue that this paper deals with is that decision theory has not yet discovered and, hence, does not assist in deciding in which situation a particular type of decision-making is most advantageous. Our research sheds light on how developers in various cultures and market contexts make decisions. This work should contribute in improving the decision-making quality in the development sector. The paper has two main parts. The first part is a literature review, which combines the find-ings on the role of intuition from the managerial decision theory and the psychological deci-sion theory. The second part introduces our research methodology and deals with a series of experiments, undertaken in South Africa and in Germany. These test the personal prefer-ences of the interviewees and then present them with a case study requiring a choice to be made between two alternative development options. The experiments will be undertaken with experienced property development practitioners and property management students. With the help of statistical analyses we intend to show the influence of personal preferences regarding intuition and deliberation on the decision behaviour in the sphere of property development. |
| Keywords: | Decision-making; Intuition; Property Development; rational behaviour |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_202&r=all |
| By: | Kossuth, Lajos (Warwick Business School); Powdthavee, Nattavudh (University of Warwick); Harris, Donna (University of Oxford); Chater, Nick (Warwick Business School) |
| Abstract: | This paper examined whether people gained significant emotional benefits from not engaging in emotional hedging – betting against the occurrence of desired outcomes. Using the 2018 FIFA World Cup as the setting for a lab-in-the-field experiment, we found substantial reluctance among England supporters to bet against the success of the England football team in the tournament. This decision not to offset a potential loss through hedging did not pay off in people's happiness following an England win. It was, however, associated with a sharp decrease in people's happiness following an England loss. Post-match happiness is relatively more stable among those who chose to hedge or were randomly allocated to hedge. We conclude that people do not hedge enough partly because they tend to overestimate the expected diagnostic cost of betting against their social identity, while underestimate the negative emotional impact from betting on their favourite to win when they did not win. |
| Keywords: | hedging, happiness, social identity, wellbeing, world cup, experienced utility |
| JEL: | I31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12589&r=all |
| By: | Jamie Hentall MacCuish (University College London) |
| Abstract: | This paper presents evidence that incorporating costly thought, modelled with rational inattention, solves two well-established puzzles in the retirement literature. The first puzzle is that, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations (e.g. Cribb, Emmerson, and Tetlow, 2016). Adding to the evidence for this puzzle, this paper includes an empirical analysis focusing on whether liquidity constraints can account for this bunching and finds they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that does match aggregate profiles. This model succeeds in matching these aggregates only by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is that people are often mistaken about their own pension provisions (e.g. Gustman and Steinmeier, 2001). Concerning this second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, thus allowing for mistaken beliefs. To the best of my knowledge, this paper is the first to incorporate rational inattention into a life-cycle model. Rational inattention not only improves the aggregate fit of the data but better matches the response of participation to the SPA across the wealth distribution, hence simultaneously offering a resolution to the first puzzle. This paper researches these puzzles in the context of the ongoing reform to the UK female state pension age |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:336&r=all |
| By: | Pierre-André Chiappori (Columbia University); José Alberto Molina (Departamento de Análisis Económico, Universidad de Zaragoza) |
| Abstract: | This paper examines cross-cultural evidence of the intra-spousal balance of power within the family. The traditional, ‘unitary’ model of the family, which assumes that members maximize a single utility function, has increasingly been challenged in recent decades, as a consequence of a questioning of the underlying income-pooling hypothesis, through attempts to assume differential preferences of family members, with the relative power of spouses being of particular significance. These non-unitary models treat family decisions as outcomes of interactions between the spouses. We focus here on collective models, which have been most widely used for that purpose. We show international evidence on the basis of the UN Human Development Index 2018. Data results indicate that, in both developed (very high and top medium HDI) and non-developed (bottom medium and low HDI) cultural areas, non-unitary models, in which intra-spousal bargaining power plays a role, are empirically accepted. The Pareto-optimality hypothesis of collective models has been accepted for most statistical data bases. In developed cultural areas, wives, on average, control between one half and two thirds of household resources, with the highest bargaining power affecting expenditure patterns. As the bargaining power of women grows, allocations to education and school attendance also tend to grow in most countries. |
| Keywords: | Cross-Cultural; Intra-marriage; Balance of Power; Non-unitary Models; Pareto-efficiency |
| Date: | 2019–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:983&r=all |
| By: | Manuela Geranio; Valter Lazzari |
| Abstract: | Shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted. Their pattern reveals a persistent equity home bias even in the Eurozone, a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area. The bias is greater for small caps because investors are reluctant to hold this class of foreign asset. Our study corroborates calendar anomalies in trading volumes, but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints. Our results reveal vanishing cost asymmetries in taking long rather than short positions. |
| Keywords: | Home bias; Equity markets; trading volumes; holiday effect; Eurozone exchanges |
| JEL: | G12 F36 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp19114&r=all |
| By: | Nobuhide Okahata (Ohio State University) |
| Abstract: | The increasing availability of micro data has led researchers to develop increasingly rich heterogeneous agent models. Solving these models involves nontrivial computational costs. The continuous-time solution method proposed by Ahn, Kaplan, Moll, Winberry, and Wolf (NBER Macroeconomics Annual 2017, volume 32) is dramatically fast, making feasible the solution of heterogeneous agent models with aggregate shocks by applying local perturbation and dimension reduction. While this computational innovation contributes enormously to expanding the research frontier, the essential reliance on the local linearization limits a class of problems researchers can investigate to the one where certainty equivalence with respect to aggregate shocks holds. This implies that it may be unsuitable for analyzing models where large aggregate shocks exist or nonlinearity matters. To resolve this issue, I propose an alternative solution method for continuous-time heterogeneous agent models with aggregate shocks by extending the Backward Induction method originally developed for discrete time models by Reiter (2010). The proposed method is nonlinear and global with respect to both idiosyncratic and aggregate shocks. I apply this method to solve a Krusell and Smith (1998) economy and evaluate its performance along two dimensions: accuracy and computation speed. I find that the proposed method is accurate even with large aggregate shocks and high curvature without surrendering computation speed (the baseline economy is solved within a few seconds). This new method is also applied to a model with recursive utility and an Overlapping Generations (OLG) model, and it is able to solve both models quickly and accurately. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1470&r=all |
| By: | Klaus Adam (University of Oxford, Nuffield College and CEPR); Dmitry Matveev (Bank of Canada); Stefan Nagel (University of Chicago, NBER, CEPR, and CESIfo) |
| Abstract: | Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the asset pricing literature are consistent with the survey evidence. We empirically test (1) the notion that survey forecasts constitute rational but risk-neutral forecasts of future returns, and (2) the notion that survey forecasts are ambiguity averse/robust forecasts of future returns. We find that these alternative hypotheses are also strongly rejected by the data, albeit for different reasons. Hypothesis (1) is rejected because survey return forecasts are not in line with risk-free interest rates and because survey expected excess returns are predictable. Hypothesis (2) is rejected because agents are not always pessimistic about future returns, instead often display overly optimistic return expectations. We speculate as to what kind of expectations theories might be consistent with the available survey evidence. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:641&r=all |
| By: | Monika Bolek (University of Lodz); Rafal Wolski (University of Lodz) |
| Abstract: | The purpose of the paper is related to understanding the preferences and motivations determining the decision making process of investment funds managers on the Polish market. Surveys concerning the investment environment, factors influencing decisions, as well as heuristics and decision traps related to investment funds managers behavior confirm the thesis that they reaction to information appearing on the market, with particular emphasis on messages from the Central Bank of Poland NBP is related to behavioral errors. The research is done on the Polish market, fast developing economy after system transformation, where the investment processes are becoming very important factor of the capital transfers mechanism. The value added of the paper is related to the direct surveys of investment funds managers in the context of the decision they make and heuristics they are affected by. |
| Keywords: | investment funds, managers’ irrationality , behavioural finance, central bank |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:smo:cpaper:4wb&r=all |
| By: | Robert Calvert Jump (University of the West of England, Bristol); Cars Hommes (University of Amsterdam); Paul Levine (University of Surrey) |
| Abstract: | We present a New Keynesian model in which a fraction n of agents are fully rational, and a fraction 1 − n of agents are bounded rational. After deriving a simple reduced form, we demonstrate that the Taylor condition is sufficient for determinacy and stability, both when the proportion of fully rational agents is held fixed, and when it is allowed to vary according to reinforcement learning. However, this result relies on the absence of persistence in the monetary policy rule, and we demonstrate that the Taylor condition is not sufficient for determinacy and stability in the presence of interest rate smoothing. For monetary policy rules that imply indeterminacy, we demonstrate the existence of limit cycles via Hopf bifurcation, and explore a rational route to randomness numerically. Our results support the broader literature on behavioural New Keynesian models, in which the Taylor condition is known to be a useful guide to monetary policy, despite not always being sufficient for determinacy and/or stability. |
| Date: | 2018–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:20181807&r=all |