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Acceptable Risk in a Portfolio Analysis

  • Steinbacher, Matjaz

A social network has been used to simulate how agents of different levels of risk aversion under different circumstances behave in financial markets when deciding between risk-free and a risky asset. This is done by a discrete time version evolutionary game of risk-loving and risk-averse agents. The evolutionary process takes place on a social network through which investors acquire information they need to choose the strategy. A significant feature of the paper is that first-order stochastic dominance is a key determinant of the decision-making, while second-order stochastic dominance is not, with the level of omniscience and preferences of agents also having a significant role. Under most of the circumstances, pure risk-aversion turns out to be dominated strategy, while pure risk-taking “almost” dominant.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13569.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:13569
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  9. Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997. "A Model of Investor Sentiment," NBER Working Papers 5926, National Bureau of Economic Research, Inc.
  10. Mark Granovetter, 2005. "The Impact of Social Structure on Economic Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 33-50, Winter.
  11. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  12. Rafal Weron, 2001. "Levy-stable distributions revisited: tail index > 2 does not exclude the Levy-stable regime," HSC Research Reports HSC/01/01, Hugo Steinhaus Center, Wroclaw University of Technology.
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