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on Utility Models and Prospect Theory |
| By: | Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Schütz, Tim Niclas (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | In this paper, we study an intertemporal utility maximization problem in which an investor chooses consumption and portfolio strategies in the presence of a stochastic factor and a no-borrowing constraint. In the spirit of the Kim–Omberg model, the stochastic factor represents the excess return of the risky asset and follows an Ornstein–Uhlenbeck process, capturing the mean reversion of expected excess returns—a feature well supported by empirical evidence in financial markets. The investor seeks to maximize expected utility from consumption, subject to the constraint that wealth remains nonnegative at all times. To address the dynamic no-borrowing constraint, we use Lagrange duality to transform the primal problem into a singular control problem in the dual space. We then characterize the solution to the dual singular control problem via an auxiliary two-dimensional optimal stopping problem featuring stochastic volatility, and subsequently retrieve the primal value function as well as the optimal portfolio and consumption plans. Finally, a numerical study is conducted to derive economic and financial implications. |
| Keywords: | optimal consumption and portfolio choice, Kim-Omberg model, no-borrowing constraint, singular stochastic control, optimal stopping, stochastic volatility |
| Date: | 2026–03–04 |
| URL: | https://d.repec.org/n?u=RePEc:bie:wpaper:766 |
| By: | Anders Karlstr\"om; Christer Persson |
| Abstract: | Models of bounded rationality include quantum--like (QL) models, which use Hilbert--space amplitudes to represent context and order effects, and entropy--regularised (ER) models, including rational inattention, which smooth expected utility by adding an information cost. We develop a unified information--geometric framework in which both arise from the same structure on the probability simplex. Starting from the Fisher--Rao geometry of the open simplex $\Delta^{n-1}$, we formulate \emph{least--action rationality} (LAR) as a variational principle for decision dynamics in amplitude (square--root) coordinates and lift it to the cotangent phase space $N:=T^*\mathbb R^n$ of unnormalised amplitudes. The lift carries its canonical symplectic form and a para--K\"ahler geometry. For a linear evaluator $\widehat V=\widehat S+\widehat F$ with symmetric part $\widehat S$ and skew part $\widehat F$, the dynamics separate an evaluative channel from a circulatory (co--utility) channel. On a distinguished zero--residual Lagrangian leaf the flow closes as a split--complex (hyperbolic) Schr\"odinger--type evolution, and observable probabilities follow from a quadratic (Born--type) normalisation. When reduced to the simplex, the induced preference one--form decomposes into an exact utility component and a divergence--free co--utility component whose curvature measures path dependence. Context effects, order effects, and interference--like deviations from the law of total probability emerge as projections of this latent rational flow. Finally, standard complex (elliptic) quantum dynamics arises within this real symplectic phase space by imposing an additional K\"ahler polarisation that restricts admissible variations. Unitary evolution is thus a coherent restriction of the underlying least--action framework rather than a primitive postulate. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.01785 |
| By: | Emmanuel Gnabeyeu |
| Abstract: | This paper is concerned with Merton's portfolio optimization problem in a Volterra stochastic environment described by a multivariate fake stationary Volterra--Heston model. Due to the non-Markovianity and non-semimartingality of the underlying processes, the classical stochastic control approach cannot be directly applied in this setting. Instead, the problem is tackled using a stochastic factor solution to a Riccati backward stochastic differential equation (BSDE). Our approach is inspired by the martingale optimality principle combined with a suitable verification argument. The resulting optimal strategies for Merton's problems are derived in semi-closed form depending on the solutions to time-dependent multivariate Riccati-Volterra equations. Numerical results on a two dimensional fake stationary rough Heston model illustrate the impact of stationary rough volatilities on the optimal Merton strategies. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.11046 |
| By: | Di Corato, Luca; Moretto, Michele |
| Abstract: | This paper studies a continuous-time regulatory problem in which a firm holds persistent private information about demand and is subject to a flow limited-liability constraint. The regulator regulates prices through a dynamic mechanism that ensures truthful reporting of the evolving type. Limited liability imposes a state-dependent lower bound on the firm’s instantaneous utility, inducing a reflecting boundary in continuation utility and giving rise to a tractable singular-control representation. We derive closed-form expressions for the optimal pricing rule and the associated continuation-utility function, and we characterize the optimal up-front transfer required to induce truthful revelation of the firm’s initial type. The resulting contract is fully explicit and highlights how limited liability shapes information rents and regulatory distortions over time. |
| Keywords: | Environmental Economics and Policy, Financial Economics |
| Date: | 2026–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:ags:feemwp:396239 |
| By: | Christopher P. Chambers; Maxime Cugnon de S\'evricourt; Christopher Turansick |
| Abstract: | In this paper, we study which data can be induced by a correlated equilibrium given a known finite simultaneous move game. We assume that an analyst has access to the frequency of each agent's actions but does not have access to the distribution over joint action profiles. We characterize which sets of marginal distributions over actions arise from some correlated equilibria via a type of no arbitrage condition. An outside observer is unable to make a profit in expectation by independently contracting with each agent and collecting a portion of the total utility gained via unilateral deviation. This characterization naturally extends to Nash equilibria. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.02113 |
| By: | Chun Pang Chow; Hiroyuki Kasahara; Yoichi Sugita |
| Abstract: | We establish nonparametric identification of production functions, total factor productivity (TFP), price markups, and firms' output prices and quantities, as well as consumer demand, using firm-level revenue data, without observing output quantity, in a monopolistically competitive environment with a fully nonparametric demand system. This result overturns the widely held view -- formalized by Bond, Hashemi, Kaplan, and Zoch (2021) -- that output elasticities and markups are not nonparametrically identifiable from revenue data without quantity information. Under the additional restriction that demand satisfies the homothetic single-aggregator (HSA) structure of Matsuyama and Ushchev (2017), we further nonparametrically identify the representative consumer's utility function from firm-level revenue data. This new identification result enables counterfactual welfare analysis without parametric assumptions on preferences. We propose a semiparametric estimator that is feasible for standard firm-level datasets under a Cobb--Douglas production specification. Monte Carlo simulations show that the estimator performs well, while treating revenue as output induces substantial bias. Applying the estimator to Chilean manufacturing data, we reject the CES specification in favor of HSA, and find that market power reduces welfare by approximately 3%--6% of industry revenue in the three largest manufacturing industries in 1996. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.01492 |
| By: | Ambler, Kate; Bakhtiar, M. Mehrab; de Brauw, Alan; Uddin, Mohammad Riad |
| Abstract: | Credit market failures may reflect voluntary withdrawal by risk-averse borrowers in addition to supply-side constraints. We conduct a randomized trial with 1, 517 Bangladeshi households, offering cattle financing through conventional loans or profit-sharing contracts that spread risk between the farmer and the financial partner. Overall, interest in and take-up of the profit-sharing contracts were modestly higher than the conventional loans. However, conventional loan take-up was much lower among risk-averse farmers, and profit-sharing eliminated the take-up gap between risk-averse and non-risk-averse farmers. We find that it is male risk preferences that are associated with these decisions even when contracts explicitly target women. Livestock investment increases under both contracts with no evidence of moral hazard under profit-sharing. |
| Keywords: | gender; credit; financing; livestock; loans; smallholders; financial innovation; access to finance; risk; risk coping strategies; Bangladesh; Southern Asia; Asia |
| Date: | 2026–02–17 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:gsspwp:181679 |
| By: | Michail Anthropelos; Jasmina Hasanhodzic; Laurence J. Kotlikoff |
| Abstract: | This paper addresses two fundamental macroeconomics questions. First, are macro shocks large enough to alter the course of the economy? Second, are they large enough to materially impact economic welfare? Lucas and many others have addressed these issues, but do so primarily in the context of representative agent models. We study these questions using a large-scale, general equilibrium, stochastic, overlapping generations model. We consider 80 generations overlapping in an economy buffeted by realistically calibrated total factor productivity and capital depreciation shocks. The model is solved using Marcet’s projection method taking explicit account of the full state space, which comprises 81 variables. Our findings, some recapitulated from prior studies by Hasanhodzic and Kotlikoff, suggest macro shocks are second order both with respect to their impact on aggregate variables and individual welfare. Specifically, the probability that the stochastic economy’s long-run aggregates materially deviate from their deterministic counterparts is less than one percent. Furthermore, the realized (simulated) lifetime utility of generations born in the long run rarely differs from deterministic long-run utility levels by more than 1 percent, measured as consumption-compensating differentials. These findings are supported by the model’s small equity premium. Moreover, they are essentially indifferent to the presence of a bond market. Both results suggest agents are minimally concerned with precautionary savings against these shocks. Our RBC-in-OLG findings suggest that what really moves the macroeconomy and demands attention is policy, not shocks. |
| JEL: | E0 E39 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34896 |