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Aversion Analysis

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Author Info

  • ALLARD, Marie
  • BRONSARD, Camille
  • GOURIÉROUX, Christian

Abstract

In this paper : a) the consumer's problem is studied over two periods, the second one involving S states, and the consumer being endowed with S+1 incomes and having access to N financial assets; b) the consumer is then representable by a continuously differentiable system of demands, commodity demands, asset demands and desirabilities of incomes (the S+1 Lagrange multiplier of the S+1 constraints); c) the multipliers can be transformed into subjective Arrow prices; d) the effects of the various incomes on these Arrow prices decompose into a compensation effect (an Antonelli matrix) and a wealth effect; e) the Antonelli matrix has rank S-N, the dimension of incompleteness, if the consumer can financially adjust himself when facing income shocks; f) the matrix has rank S, if not; g) in the first case, the matrix represents a residual aversion; in the second case, a fundamental aversion; the difference between them is an aversion to illiquidity; this last relation corresponds to the Drèze-Modigliani decomposition (1972); h) the fundamental aversion decomposes also into an aversion to impatience and a risk aversion; i) the above decompositions span a third decomposition; if there exists a sure asset (to be defined, the usual definition being too specific), the fundamental aversion admits a three-component decomposition, an aversion to impatience, a residual aversion and an aversion to the illiquidity of risky assets; j) the formulas of the corresponding financial premiums are also presented.

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 04-2003.

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Length: 55 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mtl:montec:04-2003

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Related research

Keywords: Risk aversion; aversion to impatience; illiquidity aversion; multidimensional aversions; financial premiums; Antonelli matrix; asset substitutability; Drèze-Modigliani decomposition; subjective certainty; sure and risky assets; incomplete markets;

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References

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Citations

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Cited by:
  1. Alexander Harin, 2005. "Scientific Revolution. A Farewell to EconWPA," Method and Hist of Econ Thought 0512003, EconWPA.
  2. Alexander Harin, 2005. "A Rational Irrational Man," Public Economics 0511005, EconWPA.
  3. Alexander Harin, 2005. "Gains and losses: the same or different choices? A “non-ideal” economics approach," International Finance 0509002, EconWPA.
  4. Alexander Harin, 2005. "Gains and losses. The same or different choices?," International Finance 0508004, EconWPA.

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