On Abel's Concepts of Doubt and Pessimism
Jouini, Elyès; Napp, Clotilde (2008), On Abel's Concepts of Doubt and Pessimism, Journal of Economic Dynamics and Control, 32, 11, p. 3682-3694. http://dx.doi.org/10.1016/j.jedc.2008.03.001
TypeArticle accepté pour publication ou publié
External document linkhttp://www.ifd.dauphine.fr/fr/site/ifd/les-chaires-d-entreprise/les-particuliers-face-aux-risques/les-cahiers-de-la-chaire.html
Journal nameJournal of Economic Dynamics and Control
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Abstract (EN)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 in general; see Abel [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.
Subjects / KeywordsPessimism; Optimism; Doubt; Risk Premium; Stochastic Dominance; Market Price of Risk; Portfolio Dominance; Monotone Likelihood Ratio
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