On Abel's Concept of Doubt and Pessimism
In this paper, we characterize subjective probability beliefs leading to a higher equilibrium market price of risk. We establish that Abel's result on the impact of doubt on the risk premium is not correct (see Abel, A., 2002. An exploration of the effects of pessimism and doubt on asset returns. Journal of Economic Dynamics and Control, 26, 1075-1092). We introduce, on the set of subjective probability beliefs, market price of risk dominance concepts and we relate them to well known dominance concepts used for comparative statics in portfolio choice analysis. In particular, the necessary first order conditions on subjective probability beliefs in order to increase the market price of risk for all nondecreasing utility functions appear as equivalent to the monotone likelihood ratio property.
|Date of creation:||Nov 2008|
|Date of revision:|
|Publication status:||Published in Journal of Economic Dynamics and Control, Elsevier, 2008, 32, pp.3682-3694|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00176611v2|
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