On Abel's concept of doubt and pessimism
AbstractIn this paper, we characterize subjective probability beliefs leading to a higher equilibrium market price of risk. We establish that Abel's result on the impact of doubt on the risk premium is not correct in general; see Abel [2002. An exploration of the effects of pessimism and doubt on asset returns. Journal of Economic Dynamics and Control 26, 1075-1092]. We introduce, on the set of subjective probability beliefs, market-price-of-risk dominance concepts and we relate them to well-known dominance concepts used for comparative statics in portfolio choice analysis. In particular, the necessary first-order conditions on subjective probability beliefs in order to increase the market price of risk for all nondecreasing utility functions appear as equivalent to the monotone likelihood ratio property.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 32 (2008)
Issue (Month): 11 (November)
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Web page: http://www.elsevier.com/locate/jedc
Pessimism Optimism Doubt Stochastic dominance Risk premium Market price of risk Riskiness Portfolio dominance Monotone likelihood ratio;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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