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Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model

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Author Info

  • Elyès Jouini

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)

  • Clotilde Napp

    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)

Abstract

We analyze the link between pessimism and risk-aversion. We consider a model of partially revealing, competitive rational expectations equilibrium with diverse information, in which the distribution of risk-aversion across individuals is unknown. We show that when a high individual level of risk-aversion is taken as a signal for a high average level of risk-aversion, more risk-averse agents are more optimistic. This correlation between individual risk-aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk. Risk-sharing schemes and welfare implications are analyzed. We show that agents' welfare may increase upon the receipt of more precise information.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00176630.

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Date of creation: Oct 2008
Date of revision:
Publication status: Published, Economics Letters, 2008, 101, 73-76
Handle: RePEc:hal:journl:halshs-00176630

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00176630/en/
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Related research

Keywords: Optimism; risk-aversion; rational expectations; risk-premium; heterogenous beliefs;

References

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Cited by:
  1. He, Xue-Zhong & Shi, Lei, 2012. "Disagreement, correlation and asset prices," Economics Letters, Elsevier, vol. 116(3), pages 512-515.

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