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 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.
Year of publication: |
2008
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Authors: | Jouini, E. ; Napp, C. |
Published in: |
Journal of Economic Dynamics and Control. - Elsevier, ISSN 0165-1889. - Vol. 32.2008, 11, p. 3682-3694
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Publisher: |
Elsevier |
Keywords: | Pessimism Optimism Doubt Stochastic dominance Risk premium Market price of risk Riskiness Portfolio dominance Monotone likelihood ratio |
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