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On financial bubbles, investment decisions and investor’s utility

Author

Listed:
  • Spyridon D. Symeonides

    (University of Ioannina)

  • Gerassimos Sapountzoglou

    (Athens University of Economics and Business)

Abstract

This paper is concerned with the consequences of the financial bubbles on investment deci- sions and on the expected utility of the typical investor. Under the bubble effect, the typical in- vestor undertakes more-than-optimal risks, for which there is no proper compensation, given the actual capital-market line. This leads to significant expected utility losses. Since the risk-free return is a measure of the time value of money, the issuers of risk-free assets can tame the bubble beast by being disciplined enough to maintain the return on risk-free assets at its pre-bubble equilibrium le- vel. The role of financial analysts and capital-market authorities is important nontheless.

Suggested Citation

  • Spyridon D. Symeonides & Gerassimos Sapountzoglou, 2014. "On financial bubbles, investment decisions and investor’s utility," Working Papers 201406, Athens University Of Economics and Business, Department of Economics.
    • Handle: RePEc:aeb:wpaper:201406:y:2014
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    File URL: https://www.dept.aueb.gr/sites/default/files/econ/dokimia/AllDP62014.pdf
    File Function: Released version, 2014
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    More about this item

    Keywords

    Financial bubbles; capital-market line; risk premia; expected utility; financial analysts; capital-market authorities; risk-free asset issuers.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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