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On Abel's concept of doubt and pessimism

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  • Jouini, E.
  • Napp, C.

Abstract

In 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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  • Jouini, E. & Napp, C., 2008. "On Abel's concept of doubt and pessimism," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3682-3694, November.
    • Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3682-3694
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    Cited by:

    1. Elyès Jouini & Clotilde Napp & Diego Nocetti, 2013. "Collective risk aversion," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 40(2), pages 411-437, February.
    2. Christian Gollier & Miles S. Kimball, 2018. "New methods in the classical economics of uncertainty: comparing risks," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 5-23, May.
    3. Jouini, Elyes & Napp, Clotilde, 2006. "Heterogeneous beliefs and asset pricing in discrete time: An analysis of pessimism and doubt," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1233-1260, July.
    4. Hansen, Simon Lysbjerg, 2015. "Cross-sectional asset pricing with heterogeneous preferences and beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 125-151.
    5. Diego Nocetti & Elyès Jouini & Clotilde Napp, 2008. "Properties of the Social Discount Rate in a Benthamite Framework with Heterogeneous Degrees of Impatience," Management Science, INFORMS, vol. 54(10), pages 1822-1826, October.
    6. Alfranseder, Emanuel & zhang, Xiang, 2015. "The Effect of Pessimism and Doubt on the Equity Premium," Knut Wicksell Working Paper Series 2015/5, Lund University, Knut Wicksell Centre for Financial Studies.
    7. Elyès Jouini & Clotilde Napp, 2012. "Behavioral biases and the representative agent," Theory and Decision, Springer, vol. 73(1), pages 97-123, July.
    8. Weinbaum, David, 2009. "Investor heterogeneity, asset pricing and volatility dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1379-1397, July.
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