Disappointment aversion and the equity premium puzzle: new international evidence

Drawing upon the seminal study of Ang, Bekaert, and Liu [2005. “Why Stock May Disappoint?” Journal of Financial Economics 76 (3): 471–508], we incorporate disappointment aversion (DA, that is, aversion to outcomes that are worse than prior expectations) within a simple theoretical portfolio-choice model. Based on the results of this model, we then empirically address the portfolio allocation problem of an investor who chooses between a risky and a risk-free asset using international data from 19 countries. Our findings strongly support the view that DA leads investors to reduce their exposure to the stock market (i.e. DA significantly depresses the portfolio weights on equities in all cases considered). Overall, our study shows that in addition to risk aversion, DA plays an important role in explaining the equity premium puzzle around the world.     

Credibilistic risk aversion

In the probabilistic risk aversion approach, risks are presumed as random variables with known probability distributions. However, in some practical cases, for example, due to the absence of historical data, the inherent uncertain characteristic of risks or different subject judgements from the decision-makers, risks may be hard or not appropriate to be estimated with probability distributions. Therefore, the traditional probabilistic risk aversion theory is ineffective. Thus, in order to deal with these cases, we suggest measuring these kinds of risks as fuzzy variables, and accordingly to present an alternative risk aversion approach by employing credibility theory. In the present paper, first, the definition of credibilistic risk premium proposed by Georgescu and Kinnunen [Fuzzy Inf. Eng., 2013, 5, 399–416] is revised by taking the initial wealth into consideration, and then a general method to compute the credibilistic risk premium is provided. Secondly, regarding the risks represented with the commonly used LR fuzzy intervals, a simple calculation formula of the local credibilistic risk premium is put forward. Finally, in a global sense, several equivalent propositions for comparative risk aversion under the credibility measurement are provided. Illustrated examples are presented to show the applicability of the theoretical findings.     

Loss aversion and the price of risk

This paper derives a simple theoretical relationship between the degree of loss aversion, the concavity/convexity of the value function, and the equilibrium market price of risk. We show that while the degree of loss aversion is key in determining the market price of risk, the convexity/concavity of the value function is much less important in this respect. The theoretical relationship obtained is tested empirically by using international data from 16 different countries during over 100 years, as documented by Dimson et al. [Triumph of the Optimists: 101 Years of Global Investment Returns, 2002 (Princeton University Press)]. The empirical data yield an estimate of λ=2.3 for the loss aversion index. This value is in striking agreement with estimates obtained in the very different methodology of laboratory experiments of individual decision-making.     

Risk aversion in the expected and the nonexpected utility functions

If asset returns are i.i.d. over time, the preference parameter in the time additive von Neumann-Morgenstern expected utility is the risk aversion coefficient in the Epstein-Zin nonexpected utility. By distinguishing between risk aversion and intertemporal substitution, this article provides an explanation about the observed discrepancy in the empirical estimates of the risk aversion coefficient.     

Decision making with Expected Shortfall and spectral risk measures: The problem of comparative risk aversion

We analyze spectral risk measures with respect to comparative risk aversion following Arrow (1965) and Pratt (1964) for deterministic wealth, and Ross (1981) for stochastic wealth. We argue that the Arrow–Pratt-concept per se well matches with economic intuition in standard financial decision problems, such as willingness to pay for insurance and simple portfolio problems. Different from the literature, we find that the widely-applied spectral Arrow–Pratt-measure is not a consistent measure of Arrow–Pratt-risk aversion. Instead, the difference between the antiderivatives of the corresponding risk spectra is valid. Within the framework of Ross, we show that the popular subclasses of Expected Shortfall, and exponential and power spectral risk measures cannot be completely ordered with respect to Ross-risk aversion. Thus, for all these subclasses, the concept of Ross-risk aversion is not generally compatible with Arrow–Pratt-risk aversion, but induces counter-intuitive comparative statics of its own. Compatibility can be achieved if asset returns are jointly normally distributed. The general lesson is that these restrictions have to be considered before spectral risk measures can be applied for the purpose of optimal decision making and regulatory issues.     

Modeling Asset Premiums and the Riskfree Rate in General Equilibrium CCAPM

We elaborate on the consumption capital asset pricing model (CCAPM) to reveal a set of underlying forces that determine asset returns. We use generalized preferences, allow for labor-leisure choice, a broad asset portfolio, and holding international claims. A calibration of the model with US data learns that excess stock and bond returns can be replicated. At the same time, however, the riskfree interest rate generally appears to be mispriced, consistent with Weil (1989). Additional results show that in general two optimal values of the intertemporal substitution parameter correspond with a specified coefficient of risk aversion. Tests that assess the dynamic properties of the model yield mixed results, but are most favorable when home bias is allowed.     

The world ex ante risk premium: an empirical investigation

A number of recent papers have focused on testing the linearity restrictions implied by international asset pricing models. The tests, however, have not addressed an additional restriction implied by the models; namely, that the risk premium on the world portfolio is positive. This study provides a direct assessment of this restriction. The evidence indicates that the ex ante world market risk premium can be negative. The results are robust to market proxies that are hedged and unhedged with respect to currency risk. Subperiod analysis indicates that the rejection of the positive risk premium restriction is driven by the first half of the sample period.     

Sampling distribution of the relative risk aversion estimator: Theory and applications

Brown and Gibbons (1985) developed a theory of relative risk aversion estimation in terms of average market rates of return and the variance of market rates of return. However, the exact sampling distributions of the relative risk aversion estimators have not been derived. The main purpose of this paper is to derive the exact sampling distribution of an appropriate relative risk aversion estimator. First, we have derived theoretically the density of Brown and Gibbons' maximum likelihood estimator. It is shown that the centralt is not appropriate for testing the significance of estimated relative risk aversion distribution. Then we derived the minimum variance unbiased estimator by a linear transformation of the Brown and Gibbons' maximum likelihood estimator. The density function is neither a central nor a noncentralt distribution. The density function of this new distribution has been tabulated. There is an empirical example to illustrate the application of this new sampling distribution.     

Unconventional monetary policy announcements and risk aversion: evidence from the U.S. and European equity markets

ABSTRACT

This paper examines the role of unconventional monetary policy announcements on risk aversion – as proxied by the variance premium – by using panel data analysis. The objective of this empirical analysis is to investigate the risk-taking channel of monetary policy for the major European and U.S. equity markets by studying the impact that the announcements of an unconventional monetary policy has on market uncertainty and risk perception. By measuring the difference between risk-neutral and realised and conditional variance, we estimate the variance premium, which captures the impact that pricing concerns have on the prices of options. The empirical analysis indicates that easing monetary policies can significantly reduce the variance premium. In addition, we examine the risk premium structure across markets to determine the potential differences in investors’ risk aversion.     

Relative risk aversion among the elderly

This paper examines portfolio allocation behavior of the elderly, investigating whether their behavior conforms to Arrow's postulate of increasing relative risk aversion. Additionally, the effects on risk aversion of age, race, gender, education, health status, and the number of children are examined. The source of data is the AHEAD data set that is comprised of households with at least one member aged 70 or over. In the preferred specification, evidence supports a finding of modestly decreasing relative risk aversion and statistical significance for the personal characteristics examined. Implications are drawn for the likely security markets effects of an aging population.     

Recovering the market risk premium from higher-order moment risks

We propose a consistent approach for the estimation of the market risk premium. As a first step, we define the broadest possible set of ex ante estimators from the viewpoint of a power utility optimiser holding the market portfolio. We then employ an evaluation framework to optimise the parametrisation of the methodology. We show that this theoretical framework can still produce reasonable market risk premium estimates, even when the representative agent is not a power utility optimiser. Our results show that the inclusion of higher-order moment risk premia improves the accuracy of the method.     

Commodity futures hedging,risk aversion and the hedging horizon

This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion.     

Sentiment-scaled CAPM and market mispricing

This study explores the conditional version of the capital asset pricing model on sentiment to provide a behavioural intuition behind the value premium and market mispricing. We find betas (β) and the market risk premium to vary over time across different sentiment indices and portfolios. More importantly, the state β derived from this sentiment-scaled model provides a behavioural explanation of the value premium and a set of anomalies driven by mispricing. Different from the static β–return relation that gives a flat security market line, we document upward security market lines when plotting portfolio returns against their state βs and portfolios with higher state βs earn higher returns.     

Growth uncertainty,generalized disappointment aversion and production-based asset pricing

We study a production economy with regime switching in the conditional mean and volatility of productivity growth. The representative agent has generalized disappointment aversion (GDA) preferences. We show that volatility risk in productivity growth carries a positive and sizable risk premium in levered equity. Our model can endogenously generate long-run risks in the volatility of consumption growth observed in the data. We show that introducing leverage with a procyclical dividend process consistent with the data is critical for the GDA preferences to have a large impact on equity returns.     

Relative risk aversion once more: An analysis of Japanese households' financial asset holding pattern

It is widely accepted that as the total assets increse, households tend to diversify their portfolios. In other words, absolute risk aversion is decreasing. On the other hand, the proportion of risky assets may increase or decrease depending on whether relative risk aversion (RRA) is decreasing or increasing, and its direction is still left open as an empirical question. This study examines the constancy of RRA from Japanese individual households' financial asset holding data collected in 1984. Constant RRA implies that the proportion of risky assets in one's portfolio is constant regardless of the amount of total assets. A casual observation of household portfolio holding pattern suggests that this implication is clearly violated by the data, because there are substantial proportion of households which do not hold any risky assets. Zero-holding, however, may be interpreted as a result of fixed transaction cost incurred by individual investors when they hold risky assets. Then, we pose a question, ‘Do investors hold constant proportion of risky assets, when they decide to hold them?’ In order to explain a substantial number of zero risky asset holders in the sample, we propose a portfolio selection model with a transaction cost, and estimate the model using a variant of Heckman's two-step method. In estimation we control for individual investors' socioeconomic characteristics, as well as income and total assets. The construction of the model imposes nonlinear restrictions on the two estimators, from which we can test the specification of the model. The estimation results suggest that there is a statistically significant decreasing tendency linked to total assets but that its rate of change tapers off as total assets increase. Our results are consistent with the previous studies which tended to support constant RRA for the higher asset holders, and complement previous studies in explaining lower asset holders' investment behavior.     

Myopic loss aversion and stock investments: An empirical study of private investors

Myopic loss aversion was suggested by Benartzi and Thaler (1995) as an explanation for the equity premium puzzle. Its main prediction is that loss averse investors, who evaluate their investment performance too frequently and therefore often observe small losses on their stock portfolios, would invest too little in equity. We investigate the link between myopic loss aversion and actual investment decisions of individual investors, using survey data. Our results are consistent with the predictions of Benartzi and Thaler. Higher myopic loss aversion is associated with lower stock investment as a share of total assets. Investors tend to evaluate their stock portfolio performance too often, which contributes to the prevalence of myopic loss aversion. The effect of myopia is most apparent when investors both evaluate their portfolios frequently and trade stocks regularly.     

Modelling jumps in electricity prices: theory and empirical evidence

Objective of this paper is to enhance the understanding of modelling jumps and to analyse the model risk based on the jump component in electricity markets. We provide a common modelling framework that allows to incorporate the main jump patterns observed in electricity spot prices and compare the effectiveness of different jump specifications. To this end, we calibrate the models to daily European Energy Exchange (EEX) market data through Markov Chain Monte Carlo based methods. To assess the quality of the estimated jump processes, we analyse their trajectorial and statistical properties. Moreover, even when the models are calibrated to a cross-section of derivative prices substantial model risk remains.      

Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return

A number of studies have shown that the variance risk premium (VRP), defined as the difference between risk-neutral and physical expected variances, has strong predictive power for the excess stock market return, and this predictability peaks at 3- to 6-month prediction horizons. However, little research presents empirical evidences for Chinese stock market due to the absence of option market. Under general equilibrium asset pricing framework, this article estimates time-varying VRP using the Chinese stock market data. We find that the estimated VRP predicts the excess Chinese stock market return, and this forecasting power is stronger at 4- and 5-month horizons, which is consistent with the findings of existing literature.     

论无船承运人的信用风险及其规避方法

无船承运业务经营者,又名无船承运人(NVOCC),是国际货运代理经营者之一。无船承运人具有承运人和托运人双重身份,这使得其在整个操作流程中,包括合同的签订、单证的制作、费用的收付等方面都存在信用风险。明确自身的信用风险,研究规避风险的方法对规范无船承运人的操作,对降低无船承运人的经营成本具有重要意义。目前业界对无船承运人信用风险的研究还较少,本文试从无船承运人的角度来论述自身面对的信用风险及探讨其在业务流程中规避风险的方法。