Are More Risk-Averse Agents More Optimistic ? Insights from a Rational Expectations Model

Jouini, Elyès; Napp, Clotilde

Jouini, Elyès; Napp, Clotilde (2008), Are More Risk-Averse Agents More Optimistic ? Insights from a Rational Expectations Model, Economics Letters, 101, 1, p. 73-76. http://dx.doi.org/10.1016/j.econlet.2008.06.002

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Type

Article accepté pour publication ou publié

Date

2008

Journal name

Economics Letters

Volume

101

Number

Publisher

Elsevier Science Publishers

Pages

73-76

Abstract (EN)

We analyze the link between pessimism and risk-aversion. We consider a model of partially revealing, competitive rational expectations equilibrium with diverse information, in which the distribution of risk-aversion across individuals is unknown. We show that when a high individual level of risk-aversion is taken as a signal for a high average level of risk-aversion, more risk-averse agents are more optimistic. This correlation between individual risk-aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk. Risk-sharing schemes and welfare implications are analyzed. We show that agents' welfare may increase upon the receipt of more precise information.

Subjects / Keywords

Rational expectations; Risk Premium; Optimism; Risk-aversion; Heterogeneous beliefs

JEL

G12 - Asset Pricing; Trading Volume; Bond Interest Rates
D53 - Financial Markets
D82 - Asymmetric and Private Information; Mechanism Design