Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model
AbstractWe 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 InfoPaper provided by HAL in its series Post-Print with number halshs-00176630.
Date of creation: Oct 2008
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Publication status: Published, Economics Letters, 2008, 101, 73-76
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Optimism; risk-aversion; rational expectations; risk-premium; heterogenous beliefs;
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