Economics of Risk and Time

ISBN-10: 0262572249
ISBN-13: 9780262572248
Edition: 2004
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Description: Taking into account advances in the economics of risk and uncertainty, this text updates and advances the theory of expected utility as applied to risk analysis and financial decision making.

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Book details

List price: $49.00
Copyright year: 2004
Publisher: MIT Press
Publication date: 8/20/2004
Binding: Paperback
Pages: 445
Size: 5.75" wide x 8.75" long x 0.50" tall
Weight: 1.276
Language: English

Taking into account advances in the economics of risk and uncertainty, this text updates and advances the theory of expected utility as applied to risk analysis and financial decision making.

Preface
Acknowledgments
General Theory
The Expected Utility Model
Simple and Compound Lotteries
Axioms on Preferences under Uncertainty
The Expected Utility Theorem
Critics of the Expected Utility Model
The Allais Paradox
The Allais Paradox and Time Consistency
Risk Aversion
Characterization of Risk Aversion
Comparative Risk Aversion
Certainty Equivalent and Risk Premium
The Arrow-Pratt Approximation
Decreasing Absolute Risk Aversion
Some Classical Utility Functions
Test for Your Own Degree of Risk Aversion
An Application: The Cost of Macroeconomic Risks
Change in Risk
The Extremal Approach
Second-Order Stochastic Dominance
Diversification
First-Order Stochastic Dominance
The Standard Portfolio Problem
The Standard Portfolio Problem
The Model and Its Basic Properties
The Case of a Small Risk
The Case of HARA Functions
The Impact of Risk Aversion
The Impact of a Change in Risk
The Equilibrium Price of Risk
A Simple Equilibrium Model for Financial Markets
The Equity Premium Puzzle
The Equity Premium with Limited Participation
The Equity Premium and the Integration of International Financial Markets
Some Technical Tools and Their Applications
A Hyperplane Separation Theorem
The Diffidence Theorem
Link with the Jensen's Inequality
Applications of the Diffidence Theorem
Diffidence
Comparative Diffidence
Central Risk Aversion
Central Riskiness
The Covariance Rule
Log-Supermodularity
Definition
Log-Supermodularity and Single Crossing
A Theoretical Result
Applications to the Standard Portfolio Problem
Jewitt's Preference Orders
Expectation of a Log-Supermodular Function
A Theoretical Result
Two Applications
Multiple Risks
Risk Aversion with Background Risk
Preservation of DARA
The Comparative Risk Aversion Is Not Preserved
Extensions with Dependent Background Risk
Affiliated Background Risk
The Comparative Risk Aversion in the Sense of Ross
The Tempering Effect of Background Risk
Risk Vulnerability
Risk Vulnerability and Increase in Risk
Increase in Background Risk
Increase in the Endogenous Risk
Risk Vulnerability and the Equity Premium Puzzle
Generalized Risk Vulnerability
Standardness
Taking Multiple Risks
The Interaction between Asset Demand and Small Gambles
Are Independent Assets Substitutes?
The i.i.d. Case
The General Case
The Dynamic Investment Problem
Static versus Dynamic Optimization
The Standard Portfolio Problem
The Model
The HARA Case
A Sufficient Condition for Younger People to Be More Risk-Averse
Discussion of the Results
Nonlinear Risk Tolerance
Nondifferentiable Marginal Utility
Background Risk and Time Horizon
Investors Bear a Background Risk at Retirement
Stationary Income Process
Special Topics in Dynamic Finance
The Length of Periods between Trade
Dynamic Discrete Choice
Constraints on Feasible Strategies
The Effect of a Leverage Constraint
The Case of a Lower Bound on the Investment in the Risky Asset
The Case of an Upper Bound on the Investment in the Risky Asset
The Arrow-Debreu Portfolio Problem
The Demand for Contingent Claims
The Model
Characterization of the Optimal Portfolio
The Impact of Risk Aversion
Risk on Wealth
The Marginal Propensity to Consume in State [pi]
The Preservation of DARA and IARA
The Marginal Value of Wealth
Aversion to Risk on Wealth
Consumption and Saving
Consumption under Certainty
Time Separability
Exponential Discounting
Consumption Smoothing under Certainty
Analogy with the Portfolio Problem
The Social Cost of Volatility
The Marginal Propensity to Consume
Time Diversification and Self-Insurance
Precautionary Saving and Prudence
Prudence
The Demand for Saving
The Marginal Propensity to Consume under Uncertainty
Does Uncertainty Increase the MPC?
Does Uncertainty Make the MPC Decreasing in Wealth?
More Than Two Periods
The Euler Equation
Multiperiod Precautionary Saving
Illiquid Saving under Uncertainty
The Equilibrium Price of Time
Description of the Economy
The Determinants of the Interest Rate
The Interest Rate in the Absence of Growth
The Effect of a Sure Growth
The Effect of Uncertainty
The Risk-Free Rate Puzzle
The Yield Curve
The Pricing Formula
The Yield Curve with HARA Utility Functions
A Result When There Is No Risk of Recession
Exploring the Slope of the Yield Curve When There Is a Risk of Recession
The Liquidity Constraint
Saving as a Buffer Stock
The Liquidity Constraint Raises Risk Aversion
The Liquidity Constraint and the Shape of Absolute Risk Tolerance
Numerical Simulations
The Saving-Portfolio Problem
Precautionary Saving with an Endogenous Risk
The Case of Complete Markets
The Case of the Standard Portfolio Problem
Discussion of the Results
Optimal Portfolio Strategy with Consumption
The Merton-Samuelson Model
Disentangling Risk and Time
The Model of Kreps and Porteus
Preferences for an Early Resolution of Uncertainty
Prudence with Kreps-Porteus Preferences
Equilibrium Prices of Risk and Time
Efficient Risk Sharing
The Case of a Static Exchange Economy
The Mutuality Principle
The Sharing of the Social Risk
Decomposition of the Problem
The Veil of Ignorance
Efficient Sharing Rules of the Macro Risk
A Two-Fund Separation Theorem
The Case of Small Risk per Capita
Group's Attitude toward Risk
The Representative Agent
Arrow-Lind Theorem
Group Decision and Individual Choice
Introducing Time and Investment
A Final Remark: The Concavity of the Certainty Equivalent Functional
The Equilibrium Price of Risk and Time
An Arrow-Debreu Economy
Application of the First Theorem of Welfare Economics
Pricing Arrow-Debreu Securities
Pricing by Arbitrage
The Competitive Price of Risk
The Competitive Price of Time
Spot Markets and Markets for Futures
Corporate Finance in an Arrow-Debreu Economy
Searching for the Representative Agent
Analytical Solution to the Aggregation Problem
Wealth Inequality, Risk Aversion, and the Equity Premium
Wealth Inequality and the Risk-Free Rate
The Consumption Smoothing Effect
The Precautionary Effect
Risk and Information
The Value of Information
The General Model of Risk and Information
Structure of Information
The Decision Problem
The Posterior Maximum Expected Utility Is Convex in the Vector of Posterior Probabilities
The Value of Information Is Positive
Refining the Information Structure
Definition and Basic Characterization
Garbling Messages and the Theorem of Blackwell
Location Experiments
The Value of Information and Risk Aversion
A Definition of the Value of Information
A Simple Illustration: The Gambler's Problem
The Standard Portfolio Problem
Decision Making and Information
A Technique for the Comparative Statics of More Informativeness
The Portfolio-Saving Problem
A Digression: Scientific Uncertainty, Global Warming, and the "Precautionary Principle"
The Saving Problem with Uncertain Returns
Precautionary Saving
The Value of Flexibility and Option Value
Predictability and Portfolio Management
Exogenous Predictability
Endogenous Predictability and Mean-Reversion
Information and Equilibrium
Hirshleifer Effect
Information and the Equity Premium
Epilogue
The Important Open Questions
The Independence Axiom
Measures of Risk Aversion
Qualitative Properties of the Utility Function
Economics of Uncertainty and Psychology
Bibliography
Index of Lemmas and Propositions
Index of Subjects

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