IDEAS home Printed from https://ideas.repec.org/p/een/camaaa/2008-25.html
   My bibliography  Save this paper

Strategic Risk Aversion

Author

Listed:
  • SHerrill Shaffer

Abstract

This paper demonstrates that exaggerated risk aversion may comprise a rational form of strategic behavior in the face of asymmetric information. Unlike some other forms of strategic behavior analyzed previously, this behavior confers a benefit in the form of higher ex post consumption (not merely higher expected consumption or expected utility) and whether or not markets are perfectly competitive. Such behavior might help explain historically large equity premia.

Suggested Citation

  • SHerrill Shaffer, 2008. "Strategic Risk Aversion," CAMA Working Papers 2008-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2008-25
    as

    Download full text from publisher

    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-06/25_shaffer_2008.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Jun Yu, 2009. "Simulation-Based Estimation of Contingent-Claims Prices," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3669-3705, September.
    2. Gadi Barlevy & Pietro Veronesi, 2000. "Information Acquisition in Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 79-90.
    3. Anderson, Ronald & Carverhill, Andrew, 2007. "Liquidity and Capital Structure," CEPR Discussion Papers 6044, C.E.P.R. Discussion Papers.
    4. B. Douglas Bernheim & Michael D. Whinston, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(1), pages 1-31.
    5. Li, Jing, 2009. "Information structures with unawareness," Journal of Economic Theory, Elsevier, vol. 144(3), pages 977-993, May.
    6. Sobel, Joel, 1981. "Distortion of Utilities and the Bargaining Problem," Econometrica, Econometric Society, vol. 49(3), pages 597-619, May.
    7. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
    8. Kandel, Shmuel & Stambaugh, Robert F., 1991. "Asset returns and intertemporal preferences," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 39-71, February.
    9. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
    10. Kurz, Mordecai, 1977. "Distortion of preferences, income distribution, and the case for a linear income tax," Journal of Economic Theory, Elsevier, vol. 14(2), pages 291-298, April.
    11. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    12. Gunderson James E, 2006. "Nonrevealing Equilibria and Consumption-Based Asset Pricing Models," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-17, December.
    13. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, December.
    14. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    15. Robert Wilson, 2005. "Information, efficiency, and the core of an economy," Studies in Economic Theory, in: Dionysius Glycopantis & Nicholas C. Yannelis (ed.), Differential Information Economies, pages 55-64, Springer.
    16. Holden, Craig W & Subrahmanyam, Avanidhar, 1996. "Risk Aversion, Liquidity, and Endogenous Short Horizons," The Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 691-722.
    17. Kalai, Ehud & Smorodinsky, Meir, 1975. "Other Solutions to Nash's Bargaining Problem," Econometrica, Econometric Society, vol. 43(3), pages 513-518, May.
    18. Massoud, Nadia & Bernhardt, Dan, 1999. "Stock market dynamics with rational liquidity traders," Journal of Financial Markets, Elsevier, vol. 2(4), pages 359-389, November.
    19. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    20. Shubik, Martin, 1977. "Competitive Equilibrium Contingent Commodities and Information," Journal of Finance, American Finance Association, vol. 32(1), pages 189-193, March.
    21. Jackson, Matthew O, 1991. "Equilibrium, Price Formation, and the Value of Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 1-16.
    22. Crawford, Vincent P. & Varian, Hal R., 1979. "Distortion of preferences and the Nash theory of bargaining," Economics Letters, Elsevier, vol. 3(3), pages 203-206.
    23. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 317-355.
    24. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
    25. Jeremy J. Siegel & Richard H. Thaler, 1997. "Anomalies: The Equity Premium Puzzle," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 191-200, Winter.
    26. Philip Bond, 2003. "Incentive compatible contractible information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 375-394, September.
    27. Yoshifumi Muroi, 2005. "Pricing contingent claims with credit risk: Asymptotic expansion approach," Finance and Stochastics, Springer, vol. 9(3), pages 415-427, July.
    28. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 3-13.
    29. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gomez, Juan Camilo, 2006. "Achieving efficiency with manipulative bargainers," Games and Economic Behavior, Elsevier, vol. 57(2), pages 254-263, November.
    2. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    3. Kobberling, Veronika & Peters, Hans, 2003. "The effect of decision weights in bargaining problems," Journal of Economic Theory, Elsevier, vol. 110(1), pages 154-175, May.
    4. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity -- Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
    5. Kibris, Ozgur, 2002. "Misrepresentation of Utilities in Bargaining: Pure Exchange and Public Good Economies," Games and Economic Behavior, Elsevier, vol. 39(1), pages 91-110, April.
    6. Brennan, Michael J. & Xia, Yihong, 2001. "Stock price volatility and equity premium," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 249-283, April.
    7. Sobel, Joel, 2001. "Manipulation of Preferences and Relative Utilitarianism," Games and Economic Behavior, Elsevier, vol. 37(1), pages 196-215, October.
    8. Peters, Michael, 2003. "Negotiation and take it or leave it in common agency," Journal of Economic Theory, Elsevier, vol. 111(1), pages 88-109, July.
    9. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    10. Han, Seungjin, 2006. "Menu theorems for bilateral contracting," Journal of Economic Theory, Elsevier, vol. 131(1), pages 157-178, November.
    11. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2019. "On competitive nonlinear pricing," Theoretical Economics, Econometric Society, vol. 14(1), January.
    12. Prat, Georges, 2013. "Equity risk premium and time horizon: What do the U.S. secular data say?," Economic Modelling, Elsevier, vol. 34(C), pages 76-88.
    13. Muendler, Marc-Andreas, 2008. "Risk-neutral investors do not acquire information," Finance Research Letters, Elsevier, vol. 5(3), pages 156-161, September.
    14. Bendoly, Elliot & van Wezel, Wout & Bachrach, Daniel G. (ed.), 2015. "The Handbook of Behavioral Operations Management: Social and Psychological Dynamics in Production and Service Settings," OUP Catalogue, Oxford University Press, number 9780199357222.
    15. Martimort David & Stole Lars, 2003. "Contractual Externalities and Common Agency Equilibria," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-40, July.
    16. Biais, Bruno & Foucault, Thierry & Salanie, Francois, 1998. "Floors, dealer markets and limit order markets," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 253-284, September.
    17. Yusuke Samejima, 2005. "A Note on Implementation of Bargaining Solutions," Theory and Decision, Springer, vol. 59(3), pages 175-191, November.
    18. Karos, Dominik & Rachmilevitch, Shiran, 2018. "The Midpoint-Constrained Egalitarian Bargaining Solution," Research Memorandum 007, Maastricht University, Graduate School of Business and Economics (GSBE).
    19. , & , & ,, 2014. "Nonexclusive competition under adverse selection," Theoretical Economics, Econometric Society, vol. 9(1), January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2008-25. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Cama Admin (email available below). General contact details of provider: https://edirc.repec.org/data/asanuau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.