Degree Of Risk Aversion Research Articles

Climate Uncertainty and Optimal Groundwater Augmentation

AbstractTwo approaches to augment irrigation water supply are managed aquifer recharge (MAR) and on‐farm reservoirs with tail‐water recovery (OFS‐TWR). We explore the joint use of MAR and OFS‐TWR to sustain groundwater and agricultural income with climate variability by farmer risk preference. We find that MAR use declines slightly with greater risk aversion and declines rapidly with MAR cost. The use of OFS‐TWR increases with risk aversion. The use of MAR increases income by a larger percentage for risk‐neutral than very risk‐averse producers. Across risk aversion degree, the use of MAR leads to a percentage increase in income that is double the percentage increase in the standard deviation of income (i.e., income risk). At a low cost of MAR, there is little difference in MAR use between a very risk‐averse and a risk‐neutral producer across scenarios of crop profit margin and the initial depth to water. Large differences in OFS‐TWR use between a very risk‐averse and a risk‐neutral producer occur when there are relatively high crop profit margin, low initial water depth, or a low discount rate.

No Place to Hide: Investing in a World With No Risk-Free Asset

Now, more than perhaps at any time in the past 70 years, investors are concerned that there's no asset they can invest in which is truly risk-free. Worries of unsustainable public policies leading to debasement or default – through inflation, taxation or repudiation – have sapped confidence in the traditional safe assets of bills and bonds issued by the US and other rich countries. Investors are increasingly considering whether other assets – equities, real estate, commodities, crypto-currencies – should be used to construct an ersatz risk-free asset. In this note, we'll address this problem with a practical definition of the ideal personalized risk-free asset, and then we'll discuss how to construct an efficient portfolio when that ideal asset doesn't exist in investable form. Rather than the common practice of trying to construct a pseudo-risk-free asset from a set of available assets which don't really fit the bill, instead we should simply treat the opportunity set as consisting entirely of risky assets and optimize the real risk-adjusted return of the risky portfolio, using our personalized inflation index as the deflator. In practice, this approach to portfolio construction in the absence of a truly risk-free asset is flexible enough to handle an arbitrarily large number of different assets and a broad range of assumptions about possible outcomes in asset prices, including discontinuous jumps as well as changing risk and correlation patterns over time. The impact of this change in perspective will depend largely on the starting point of the investor's asset allocation. For investors with low to moderate risk-aversion– who start off with a high allocation to equities and other patently risky assets– treating the safest assets as being risky, but still the least risky of the available options, is likely to have a modest impact on optimal portfolio weights. But for investors who exhibit a high level of risk-aversion, who are mostly allocated to the safest assets to begin with, explicitly accounting for the risk in government bills and bonds can have a significant impact on their asset allocation. And for almost all investors, regardless of their degree of risk-aversion, moving to an Ideal Risk-Free Asset more closely aligned with per capita income growth will reduce the investor's risk-adjusted real return and thereby call for a lower long-term spending policy.

Asset Pricing Based on Micro Consumption

This paper proposes an estimable asset pricing model that builds upon micro consumption and reference-dependent preference. Central to the model is an S-shaped consumption utility function that is convex below the reference point. The model quantitatively accounts for both low risk-free rates and high equity premiums. The S-shaped consumption utility works by rationalizing the micro-level finding that, for many people, consumption growth correlates negatively with asset returns. When global concavity is maintained, the equity premium puzzle remains because the estimated degree of relative risk aversion given a high consumption-reference ratio is absurdly large.

Multi-prize contests with risk-averse players

This paper studies a multi-prize imperfectly discriminatory contest with symmetric risk-averse contestants. Adopting a multi-winner nested Tullock contest model, we first establish the existence and uniqueness of a symmetric pure-strategy equilibrium under plausible conditions. We then investigate the optimal prize allocation in the contest. Our analysis provides a formal account of the incentive effects triggered by a variation in the prevailing prize structure when contestants are risk averse. We demonstrate that contestants' incentive subtly depends not only on the degree of a contestant's risk aversion but also that of his prudence. The former affects the marginal benefit of effort, while the latter affects the marginal cost. We derive sufficient conditions under which a single-(multi-)prize contest would be optimal when the contest designer aims to maximize total effort. We also discuss in depth the roles played by risk aversion and prudence in optimal prize allocation.

A Nash bargaining solution for a multi period competitive portfolio optimization problem: Co-evolutionary approach

This study focuses on proposing a Nash bargaining model to solve a novel multi-period competitive portfolio optimization problem for large investors in the stock market who want to maximize their terminal wealth while taking into account competitors' profits. In this study, a Competitive Portfolio Model (CPM) is developed in accordance with the Cournot competition principle for a static, non-cooperative, and non-zero-sum game with complete information. Transaction costs, risk-free assets and cash are also included to match real-world conditions. Also, three criteria including the average value at risk, the mean absolute semi-deviation, and entropy are considered to control the investment risk in the model. Moreover, due to common constraints between players (free floating shares of risky assets) in stock markets, this study falls into the category of Generalized Nash Equilibrium Problems (GNEP). Therefore, to overcome the problem, a Cooperative Co-evolutionary Algorithm (CCA) based on Particle Swarm Optimization (PSO) is customized and used. A few experimental tests and a numerical example with descriptive analytics (using real data from two large mutual funds who invest in the Iranian Stock Exchange market) are used to evaluate the feasibility of the proposed model and the efficiency of the design algorithm. After solving the model, for each time period, investors' trading strategies (trading signals and stock volume in their portfolio) are determined. The results show that the volume of transactions due to the market power of an investor has a significant effect on the terminal wealth of competitors. Also, the results of sensitivity analysis show that profit-making is inversely related to the degree of risk aversion of investors.

Risk-Aversion for Negative Health Outcomes May Promote Individual Compliance to Containment Measures in Covid-19 Pandemic.

First-person experience of stressful life events can change individuals' risk attitudes, driving to increased or decreased risk perception. This shift to more risk-averse or risk-loving behaviors may find a correlate in the individual psycho-socio-emotional profile. To this purpose, we aimed to estimate the relationship between differences in risk-taking attitudes toward possible negative health outcomes and psycho-socio-emotional dimensions modulating the experience of life-threatening situations, in the context of the Covid-19 pandemic. In March 2020, we launched the PsyCovid Study (https://wprn.org/item/428452) to assess psycho-socio-emotional changes due to Covid-19 pandemic in the Italian population. Additionally, we distributed to 130 participants the Covid-19 Risk Task, including monetary and health-related stimuli, estimating a measure of risk-aversion toward health and classifying participants on the basis of their risk-attitude profiles. The set of psycho-socio-emotional variables was reduced to three PCA components: Proactivity, Isolation, Inactivity. The individual degree of risk-aversion toward negative health outcomes was directly related to Proactivity, encasing empathic, social support and positive coping strategies, which may prompt individuals to put in place self-protection strategies toward possible negative health consequences. These findings indicate that a risk-averse profile toward possible negative health outcomes may be associated to higher levels of individual prosocial and proactive dispositions, possibly making individuals' more compliant with the social and hygienic guidelines and, thus, reducing their exposure to the SARS-CoV-2 infection.

Procurement risk management in a petroleum refinery

ABSTRACTWe analyze a petroleum refinery's procurement strategy, explaining how risk management affects optimal sourcing from long‐term, spot, and swap contracts. We use time series analysis to model the interaction between petroleum prices, transportation costs, and gross product worth. These models are then used to generate the scenarios incorporated in the stochastic program applied to compute the conditional value‐at‐risk. We prove the necessary and sufficient conditions for the optimal procurement and risk management strategies, and show that risk aversion can be better represented by the weighted average between expected profit and conditional value‐at‐risk, deriving the respective ISO curves. We estimate that an increase in the degree of risk aversion decreases the use of swap contracts. Our model is applied to the analysis of a refinery based in Singapore. Using regression analysis, we show we cannot reject the hypothesis of a statistically significant relationship between the way Saudi Arabia prices the long‐term contracts and the shape of the forward curve. We then study how risk aversion influences the procurement strategies, profitability, and risk exposure of the refinery. Finally, we analyze the pricing of long‐term (forward) contracts by Saudi Arabia, and study how the country could benefit from a different pricing policy.

Decisions on Probabilistic Selling for Consumers with Different Risk Attitudes

Consumer attitudes toward probabilistic goods are affected not only by their personal preferences, but also by their risk propensity. However, because the probability of obtaining their preferred items is determined by the retailer, consumers must search for related information and rely on their own subjective judgments to reduce the risk of not obtaining them. This study investigates the effects that consumer risk attitudes and word of mouth have on consumers’ purchase decisions regarding probabilistic goods and develops a pricing model for probabilistic selling in which a retailer offers probabilistic goods to heterogeneous consumers with different risk attitudes and possible social interactions. The analytical results show that a retailer’s profit decreases as the degree of risk aversion increases under the probabilistic selling strategy. In addition, word of mouth affects consumers’ purchasing decisions regarding different degrees of belief that they will obtain their preferred items. When the word-of-mouth effect decreases, the consumers’ perceived probability of obtaining their preferred items also decreases, which, consequently, reduces the retailer’s profits.

Board gender diversity, firm performance and risk-taking in developing countries: The moderating effect of culture

We examine the moderating effects of culture on the relationship between board gender diversity and corporate risk-taking and firm performance in 27 developing countries and find that board gender diversity is negatively related to both operating and financial risk and positively related to firm performance. We also document a moderating effect of culture on the board gender diversity - risk-taking relationship. In countries that rank high on masculinity, individualism, and long-term orientation and therefore, are prone to taking higher risk, culture attenuates the risk reduction effect of board gender diversity. Uncertainty avoidance reinforces the risk reduction impact of board gender diversity. The years following the financial crisis have witnessed an increase in the number of women on corporate boards and the increase coincides with a moderation in the risk reduction effect of gender-diverse boards. This finding is consistent with prior literature (e.g., Adams and Funk, 2012) that shows that female’s degree of risk aversion may reduce once they have broken through the glass ceiling and have adapted to a male-denominated culture. Our results are robust to the use of different measures of risk and to the correction of endogeneity issues.

Does the risk aversion of crude oil market investors have directional predictability for the precious metal and agricultural markets?

PurposeRisk aversion is considered as an important factor in predicting asset prices. Many studies have proved that there exists important price information spillover among crude oil, precious metals and agricultural markets. Then there naturally follows the question: Is the risk aversion of investors in crude oil market predictable for the returns of precious metals and agricultural products? The purpose of this paper is to answer this question. For this reason, the authors explore the directional predictability and the cross-quantile dependence between risk aversion of crude oil market investors and returns of precious metals and agricultural products.Design/methodology/approachTo better describe the risk aversion of investors, this paper uses high-frequency data and model-free calculation method to obtain variance risk premium of crude oil. Then, this paper uses the cross-quantilogram method to investigate the directional predictability and cross-quantile dependence between risk aversion of crude oil market investors and returns of precious metals and agricultural products. Meanwhile, it employs the partial cross-quantilogram (PCQ) method to test the impact of control variables on the empirical results.FindingsFirstly, risk aversion of crude oil market investors has directional predictability for returns of precious metals and agricultural products. Secondly, different degrees of risk aversion of crude oil market investors have different impacts on returns of precious metals and agricultural products. A low (high) degree of crude oil market investors' risk aversion has negative (positive) predictability for returns of precious metals and agricultural products. Finally, during the sample period, the returns of precious metals are more affected by risk aversion of crude oil market investors than returns of agricultural products.Originality/valueFirst of all, this paper studies the impact of risk aversion of crude oil market investors on returns of precious metals and agricultural products. It updates previous relevant studies on the factors influencing the prices of precious metals and agricultural products, and provides a new idea for the forecast of those commodity returns. Secondly, this paper provides the evidence that different degrees of risk aversion of investors have different effects on the returns of commodities, and expands the research on the topic of commodity returns prediction. Finally, high-frequency data are employed in this paper to better capture the risk aversion of investors than commonly used daily data.

A Dynamic Oligopoly with Price Stickiness and Risk-Averse Agents

In this paper we present a dynamic discrete-time model that allows to investigate the impact of risk-aversion in an oligopoly characterized by a homogeneous non-storable good, sticky prices and uncertainty. The continuous-time limit of our formulation nests the classical dynamic oligopoly model with sticky prices by Fershtman and Kamien (Econometrica 55:1151–1164, 1987) and extends it by accommodating uncertainty and risk-aversion. We show that in the continuous-time limit of our infinite horizon formulation the optimal production strategy and the consequent equilibrium price are, respectively, directly and inversely related to the degrees of uncertainty and risk-aversion. However, the effect of uncertainty and risk-aversion crucially depends on price stickiness since, when prices can adjust instantaneously, the steady state equilibrium in our model with uncertainty and risk-aversion collapses to Fershtman and Kamien’s analogue.

The effects of in-transit inventory financing on the capital-constrained supply chain

In-transit inventory financing is gaining popularity as an alternative way to access financing. However, compared with other financing means such as trade credit and bank loans, the effects on the supply chain of a third-party logistics provider (TPL) providing in-transit inventory financing are seldom investigated. This study adopts a channel competition model to examine the impact of such financing on the supply chain. Through comparative analysis with conventional financing approaches, we find that the availability of in-transit inventory financing allows retailers to take advantage of a lower financing fee for trade credit, even when the demand for trade credit decreases. In addition, the TPL-provided financing service can lead to a reduction in financing fee for both trade credit and in-transit inventory financing when both the supplier and retailers have financing demand or the TPL is subject to a high degree of risk aversion. Finally, when the TPL has the first-mover advantage in setting its financing fee, the supplier with a financing demand pays a lower financing fee to the TPL due to the decreased demand for in-transit inventory financing. In this case, we find that the low logistics cost, the low unit product price without trade credit and a high financing ratio can make in-transit inventory financing more attractive than trade credit. Our results have important implications for the implementation of in-transit inventory financing in supply chains.

Analysis the effect of market anomalies and growth options on stock return

در بازارهای مالی اثر هر یک از ناهنجاری‌های سودآوری، درماندگی مالی، بخت‌آزمایی و ریسک غیر سیستماتیک بر بازده سهام به‌تنهایی بررسی شده است. اما ارتباط احتمالی آن‌ها نامشخص است. به‌تازگی این ادعا مطرح‌شده است که فرصت‌های رشد بر تقارن تابع توزیع بازده اثر می‌گذارد و قادر است این ارتباط احتمالی و صرف ریسک ناشی از این ناهنجاری‌ها را توضیح دهد. در این پژوهش با استفاده از خواص آماری حاکم بر گشتاور مرتبه سوم تابع توزیع بازده و با جداسازی چولگی ویژه مورد انتظار ناشی از فرصت‌های رشد این ارتباط بررسی شده است. بدین منظور داده‌های 114 شرکت پذیرفته‌شده در بورس اوراق بهادار تهران با رویکرد حذف سیستماتیک، بین سال‌های 1390 تا 1396 جمع‌آوری شد. فرضیه‌های پژوهش با استفاده از رویکرد سبد بندی و ارزیابی آلفای برخی مدل‌های عاملی آزمون شد. شواهد نشان می‌دهد بین سودآوری، درماندگی مالی، بخت‌آزمایی و ریسک غیر سیستماتیک با بازده آتی رابطه وجود دارد؛ اما مدل‌های مرسوم قیمت‌گذاری دارایی‌های سرمایه‌ای توانایی تبیین صرف ناشی از ناهنجاری‌های مذکور را ندارد. این شواهد به‌صورت غیرمستقیم مؤید وجود معمای سودآوری، بخت‌آزمایی و ریسک غیر سیستماتیک در بازار سرمایه ایران است و نشان می‌دهد سرمایه‌گذاران با گزینش راهبرد سرمایه‌گذاری مبتنی بر این ناهنجاری‌ها می‌توانند بازده متفاوتی داشته باشند.

Robust Design of a Real-Life Water Distribution Network under Different Demand Scenarios

In this paper a scenario-based robust optimization approach is proposed to take demand uncertainty into account in the design of water distribution networks. This results in insight in the trade-off between costs and performance of different designs. Within the proposed approach the designer is able to choose the desired degree of risk aversion, and the performance of the design can be assessed based on the water demand effectively supplied under different scenarios. Both future water demand scenarios and scenarios based on historical records are considered. The approach is applied to the design of a real-life water distribution network supplying part of a city in the Netherlands. From the results the relation between costs and performance for different scenarios becomes evident: a more robust design requires higher design costs. Moreover, it is proven that numerical optimization helps finding better design solutions when compared to manual approaches. The developed approach allows water utilities to make informed choices about how much to invest in their infrastructure and how to design it in order to achieve a certain level of robustness.

Capital Income Taxation under Full loss offset Provisions of a Prospect Theory Investor

In this paper we examine capital income taxation of a reference dependent sufficiently loss averse investor in a two period portfolio choice model under full loss offset provisions. Capital income taxation with loss offset provisions has been found to stimulate risk taking in expected utility models under certain assumptions about attitudes towards risk but would such effect be found under prospect theory type of preferences? We observe that the impact of capital income taxation depends on investors’ reference levels relative to their endowment income and thus we explore capital income taxation for different types of loss averse investors in terms of their ambition. We consider the less ambitious investors to be the ones with relatively low reference levels (they avoid relative losses in both periods) and more ambitious investors to be those with relatively high reference levels. We analyze two types of more ambitious investors: investors with higher time preference (who experience relative losses only in the second period under the bad state of nature) and investors with lower time preference (who experience relative losses only in the first period). We observe that capital income taxation stimulates current consumption in most cases which encourages risk taking, although the final outcome would depend on the investors’ degree of risk aversion, the rate of time preference and the tax rate in relation to certain thresholds. Current consumption could be discouraged for some ambitious type of investors that have relatively high second period reference levels but not necessary first period reference levels. in summary, to determine the impact of capital income taxation on the decision variables the reference levels in relation to endowment income play the most significant role. Ignoring reference depended preferences can lead to different conclusions for investors reaction to capital income taxation. We also find certain type of investors whose happiness level increases with capital income taxation under full loss offset provisions.

Inventory strategy of the risk averse supplier and overconfident manufacturer with uncertain demand

Uncertainty in market demand can lead to excess inventory, and the resulting inventory risk has led to different inventory strategies to distribute the risk. There are three inventory strategies: push strategy, pull strategy, and “prebook + at-once” strategy, depending on whether the inventory risk is borne by one or both of the supplier or manufacturer. This paper examines the optimal decisions and the strategy preferences of a risk averse supplier and an overconfident manufacturer. The results show that the supplier's risk aversion always reduces the number of products supplied and the profit of participants under the pull strategy, while the manufacturer's overconfidence may bring better profit and higher order quantity under the push strategy. Moreover, the degree of risk aversion of the supplier would affect whether the “prebook + at-once” strategy can realize sharing of inventory risk between the supplier and the manufacturer. Concerning the preference for inventory strategy, the supplier and the manufacturer cannot achieve a win-win situation on any strategy other than the push strategy under certain conditions. Finally, we also investigate the impact of three key factors, including risk attitude, market conditions, and contract terms, on the participants' optimal decisions and profits.

Conservation, risk aversion, and livestock insurance: The case of the snow leopard

AbstractLivestock insurance consists of livestock owners pooling resources together in order to hedge against the risk of attacks by predators on their individual herds. We use an economic model to study optimal livestock insurance and to discuss its viability in improving outcomes for livestock owners. The benefit from insurance depends on the livestock owners' level of risk aversion. We calibrate the model using data from Project Snow Leopard and investigate the potential of livestock insurance for achieving conservation goals. The model predicts that leopard killings would decline under the proposed livestock insurance contract. The level of the decline depends on the degree of risk aversion. Our analysis calls for surveys that measure risk aversion of local livestock owners to be conducted in any situation where insurance is considered as a policy towards achieving conservation goals. Finally, we discuss how the proposed livestock insurance scheme could be implemented in practice.

Optimal sequential contract with a risk‐averse supplier

AbstractWe study optimal contracts in environments where a risk‐averse supplier discovers cost information privately and gradually over time: the supplier is privately informed about its cost uncertainty at the time of contracting and discovers the realization of cost condition privately after contracting and before production. We show that both the buyer and the supplier prefer more cost uncertainty when the supplier is not very risk‐averse but less cost uncertainty when the supplier is sufficiently risk‐averse. However, the buyer always prefers to contract before the cost uncertainty resolves regardless of the supplier's degree of risk aversion. The nature of the optimal contract also depends on the supplier's risk preference. A separating contract is optimal when the supplier is not very risk‐averse; however, a pooling contract, which offers the same contract terms regardless of the cost uncertainty, can be optimal when the supplier becomes sufficiently risk‐averse. Moreover, the optimal production schedule is often characterized by “inflexible rules.”

How to encourage innovation failure knowledge sharing in virtual research organization: an incentive mechanism based on game theory

Innovation failure knowledge sharing plays an important role in reducing the probability of repeated failure of subsequent innovation and improving innovation ability of virtual research organization. However, it is very difficult for members to actively share the innovation failure knowledge without incentives. To promote the sharing behavior of innovation failure knowledge in virtual research organization, by using game theory, considering the risk aversion degree of members and the negative effect of fault-tolerance environment, the incentive model of innovation failure knowledge sharing of virtual research organization was constructed, the incentive relationship of innovation failure knowledge sharing between organization and its members under the influence of different states was analyzed, and the theoretical model was simulated and verified through a case study from China. Results show that: (1) without considering the negative effect of fault-tolerant environment, the optimal incentive coefficient of innovation failure knowledge sharing is positively related to the shareable rate and the transformation ability of innovation failure knowledge of members, and negatively related to the sharing cost and risk aversion degree of members; (2) considering the negative effect of fault-tolerant environment, virtual research organization should make a corresponding modification of sharing incentive intensity according to the estimation of tolerance degree to fault-tolerant environment by itself and its members, so as to reduce the knowledge input of organization. The findings obtained from this study provide a novel idea and method for the design of incentive mechanism of innovation failure knowledge sharing of virtual research organization.

A dynamic conditional approach to forecasting portfolio weights

From the autoregressive representation of the portfolio-variance optimization problem, we derive a novel model for conditional portfolio weights as a linear function of past conditional and realized (and, hence, observable) terms. This dynamic conditional weights (DCW) approach is benchmarked against popular model-based and model-free specifications in terms of weights forecasts and portfolio allocations. Next to portfolio turnover and variance, we introduce the break-even transaction cost as an additional measure that identifies the range of transaction costs for which one allocation is preferred to another. By comparing minimum-variance portfolios built on the components of the Dow Jones 30 Index, the proposed DCW attains the best allocations overall with respect to the measures considered, for any degree of risk aversion, transaction costs, and exposure.