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on Utility Models and Prospect Theory |
| By: | Henk Keffert; Nikolaus Schweizer |
| Abstract: | When it comes to structural estimation of risk preferences from data on choices, random utility models have long been one of the standard research tools in economics. A recent literature has challenged these models, pointing out some concerning monotonicity and, thus, identification problems. In this paper, we take a second look and point out that some of the criticism - while extremely valid - may have gone too far, demanding monotonicity of choice probabilities in decisions where it is not so clear whether it should be imposed. We introduce a new class of random utility models based on carefully constructed generalized risk premia which always satisfy our relaxed monotonicity criteria. Moreover, we show that some of the models used in applied research like the certainty-equivalent-based random utility model for CARA utility actually lie in this class of monotonic stochastic choice models. We conclude that not all random utility models are bad. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.00704 |
| By: | David M. Kaplan |
| Abstract: | Instead of testing for unanimous agreement, I propose learning how broad of a consensus favors one distribution over another (of earnings, productivity, asset returns, test scores, etc.). Specifically, given a sample from each of two distributions, I propose statistical inference methods to learn about the set of utility functions for which the first distribution has higher expected utility than the second distribution. With high probability, an "inner" confidence set is contained within this true set, while an "outer" confidence set contains the true set. Such confidence sets can be formed by inverting a proposed multiple testing procedure that controls the familywise error rate. Theoretical justification comes from empirical process results, given that very large classes of utility functions are generally Donsker (subject to finite moments). The theory additionally justifies a uniform (over utility functions) confidence band of expected utility differences, as well as tests with a utility-based "restricted stochastic dominance" as either the null or alternative hypothesis. Simulated and empirical examples illustrate the methodology. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.13949 |
| By: | Dubiel-Teleszynski, Tomasz; Kalogeropoulos, Konstantinos; Karouzakis, Nikolaos |
| Abstract: | We explore the statistical and economic importance of restrictions on the dynamics of risk compensation from the perspective of a real-time Bayesian learner who predicts bond excess returns using dynamic term structure models (DTSMs). The question on whether potential statistical predictability offered by such models can generate economically significant portfolio benefits out-of-sample is revisited while imposing restrictions on their risk premia parameters. To address this question, we propose a methodological framework that successfully handles sequential model search and parameter estimation over the restriction space in real time, allowing investors to revise their beliefs when new information arrives, thus informing their asset allocation and maximizing their expected utility. Empirical results reinforce the argument of sparsity in the market price of risk specification since we find strong evidence of out-of-sample predictability only for those models that allow for level risk to be priced and, additionally, only one or two of these risk premia parameters to be different than zero. Most importantly, such statistical evidence is turned into economically significant utility gains, across prediction horizons, different time periods and portfolio specifications. In addition to identifying successful DTSMs, the sequential version of the stochastic search variable selection scheme developed can be applied on its own and offer useful diagnostics monitoring key quantities over time. Connections with predictive regressions are also provided. |
| Keywords: | parameter & model uncertainty; bond return predictability; economic value; dynamic term structure models; Bayesian sequential learning |
| JEL: | C1 |
| Date: | 2024–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123659 |
| By: | Antonio Cutanda (Universidad de Valencia, Valencia, Spain); Juan A. Sanchis (Universidad de Valencia and ERICES, Valencia, Spain) |
| Abstract: | In this paper, we estimate the intertemporal substitution for consumption and leisure in Spain. We use the standard intertemporal optimisation consumption model with an intratemporally separable utility function, using different population groups: employees, self-employed, unemployed or retired people. Further, we analyse if the elasticity of intratemporal substitution for leisure is affected by the individual labour status (temporary workers vs fixed-term contract workers). For this purpose, we use the panel of the Spanish Survey on Household Finances (Encuesta Financiera de las Familias, SHF), covering the period 2002- 2017. The results we obtain confirm that both intertemporal substitution elasticities for consumption and leisure are different depending on individuals’ labour status and the labour contract’s characteristics, such as the duration of the contract (temporary versus fixed-term) or the degree of uncertainty about the future. |
| Keywords: | Euler Equation, Instrumental variables, Intertemporal Substitution for consumption and leisure, Panel data |
| JEL: | C23 C26 D12 D15 J22 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:eec:wpaper:2408 |
| By: | Huang, Chenchen; Luo, Di; Mukherjee, Soumyatanu; Mishra, Tapas |
| Abstract: | Environmental risk (ER) has become increasingly crucial in international business, and firms endeavor to integrate environmental risk management (ERM) into business strategies. Examining a sample of cross-border mergers and acquisitions (M&As) and alliances conducted by US firms from 39 host countries over the last two decades, we show that US firms tend to prefer to choose cross-border M&As over alliances when the ER of foreign partners is high, consistent with the prediction of a mean-variance utility model. The propensity towards M&As is amplified by US firms’ corporate governance quality, financial flexibility, and adherence to the host-country’s sustainability disclosure reforms. Further, US firms experience high announcement abnormal returns when they select M&A deals rather than alliances to manage high ER from foreign partners. Overall, our study provides novel insights into ERM in firms’ decision-making around international expansion. |
| Keywords: | Cross-border mergers and acquisitions; strategic alliances; corporate social responsibility; environmental risk |
| JEL: | D81 G34 |
| Date: | 2022–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121808 |
| By: | Kandhra, Diya; MacCurdy, Dwight; Lipman, Timothy PhD |
| Abstract: | To better understand inequities in EV charging costs, we compared charging costs at public EV DCFC stations to the cost for single-family housing (SFH) residents charging at home for three California electric utility service areas, the Sacramento Municipal Utility District (SMUD), San Diego Gas and Electric Company (SDG&E) and Pacific Gas and Electric Company (PG&E), and for three specific urban areas - Sacramento, San Diego, and San Jose. We used a combination of observed pricing data from PlugShare, a crowd-sourced database of public EV charging, and public DCFC pricing data from electric vehicle service provider (EVSP) websites, as well as electric utility tariff information from their respective websites. |
| Keywords: | Engineering |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:itsrrp:qt9dn2j441 |