Aversion Index Research Articles

Analysis of Socio-economic Factors on Dry Farming Households of Ananthapuramu District of Andhra Pradesh, India

This study examines the socio-economic profile, household income, and risk aversion behaviour of dry farming households in the Ananthapuramu district of Andhra Pradesh. The research employs a range of analytical tools, including percentages, averages, Lorenz curve, Gini ratios, and multiple linear regression analysis, to investigate income inequalities and risk aversion among farmers. Data was collected through structured questionnaires from 120 randomly selected respondents within the study area. The results revealed that a significant proportion of farmers fell within the age group of 30-39 years (33%), while the majority had attained primary level education (33%). The average family size was 4 to 5 members (68%), comprising 33% males, 31% females, and 35% children. The composition of earners and dependents was found to be 1:1.98, indicating a relatively balanced distribution between those who contributed to household income and those who relied on it. Regarding asset ownership, most farmers possessed land as the primary asset, followed by buildings and implements. The majority of the sampled farmers operated small farms, with 1 to 2 hectares being the prevalent farm size. Income sources were primarily derived from cultivating crops such as groundnut, paddy, cotton, Bengal gram, and tomatoes, alongside income from livestock activities. The study further assessed income inequality using Gini ratios and Lorenz curves. It was found that farmers with less than 1 hectare of land experienced higher income inequality compared to those with larger farms (1-2 hectares and more than 2 hectares). Risk aversion index of the dry farming households was calculated and found to be 3.60 indicating that farmers are risk averters.

On Correlation Aversion and Insurance Demand

This is a study of decision problems under two-dimensional risk. We use an existing index of absolute correlation aversion to conveniently classify bivariate preferences, with respect to attitudes toward this risk. This classification seems to be more important than whether decision makers are correlation-averse or correlation-seeking for the study of insurance demand when a loss has a multidimensional impact. On this note, we also re-examine Mossin’s theorem under bivariate preferences, where full insurance is preferred with a fair premium, while less than full coverage is preferred with a proportional premium loading. Furthermore, based on the comparative statics of this two-dimensional insurance model for changes in correlation aversion, we derive testable implications about the classification of bivariate utility functions. For the particular case when the two-dimensional risk can be interpreted as risk on income and health, we identify the form of separable utility functions depending on health status and income that is consistent with household disability insurance decisions.

Multiobjective Optimization of Stock Portofolio

Diversification is a method used to reduce risks by allocating several financial, industrial, and other instruments. Investors might need to use this method to allocate their companies’ funding as efficient as they should be. Mean variance portfolio is a diversification theory designated for investors who are aware of potential risks. On the other hand, multi-objective portfolio optimization is another theory that suits for investors who are more unaware, or choose to neglect potential business risks. Multi-objective optimization can boost source of income and minimize the risks while utilizing k weighting coefficient as risk aversion index. This research aims to form an optimal portfolio from each perspective of selected investors using multi-objective optimization, as well as to analyze the benefits and risks that the investors will have. Samples used in this research are sharia stocks actively involved in Jakarta Islamic Index (JII) and non-sharia stocks which are actively involved in LQ-45 from January 2013 to January 2018.

The predictive effect of risk aversion on oil returns under different market conditions

This paper uses a new risk aversion index to investigate the predictive effect of risk aversion on oil returns under different market conditions. Moreover, we assess whether the US partisan conflict shapes the prediction of risk aversion for oil returns. Based on the quantile regressions of oil returns on lagged risk aversion changes, we find that risk aversion negatively predicts oil returns after oil financialization, and such a predictive effect is stronger under bearish market conditions. Also, we find that the negative predictive effect of risk aversion is weaker with increasing lags in bearish stages, but this negative effect does not last in bullish stages and even becomes positive at a longer lag. Finally, we find that the US partisan conflict mitigates the negative predictive effect of risk aversion on oil returns in the post-financialization period, and this mitigation is stronger in upward market conditions. Our findings provide novel insight into the determinants of oil prices from the perspective of investors' risk appetite.

Investigation of Following Vehicles’ Driving Patterns Using Spectral Analysis Techniques

Despite the potential benefits of autonomous vehicles (AVs) of reducing human driver errors and enhancing traffic safety, a comprehensive evaluation of recent AV collision data reveals a concerning trend of rear-end collisions caused by following vehicles. This study aimed to address this issue by developing a methodology that identifies the relationship between driving patterns and the risk of collision between leading and following vehicles using spectral analysis. Specifically, we propose a process for computing three indices: reaction time, stimulus compliance index, and collision-risk aversion index. These indices consistently produced reliable results under various traffic conditions. Our findings align with existing research on the driving patterns of following vehicles. Given the consistency and robustness of these indices, they can be effectively utilized in advanced driver assistance systems or incorporated into AVs to assess the likelihood of collision risk posed by following vehicles and develop safer driving strategies accordingly.

Beyond uncertainty aversion

Although much of the theoretical and applied literature involving decision under ambiguity works under the assumption of uncertainty aversion, experimental evidence suggests that it is not a universal behavioural trait. This paper introduces and axiomatises the family of α-UA (for α-Uncertainty Attitude) preferences: a simple extension of uncertainty averse preferences with a Hurwicz-style mixing coefficient, so as to admit a richer range of uncertainty attitudes. The parameters of the model are uniquely identified in our characterisation. It provides, in the Hurwicz α-maxmin EU special case, a new resolution of a long-standing identification problem. It also yields novel models, including extensions of variational and multiplier preferences. Comparative statics support the interpretation of the mixing coefficient as an index of imprecision aversion. In a standard portfolio problem, the model yields the intuitive relationship between imprecision aversion and investment in an uncertain asset: as the former increases, the latter decreases.

Valuing new drug R&D project under economic fluctuation, technical risks and subjective uncertainty

In the process of research and development (R&D) projects on new drugs, firms must face many challenges. The most serious challenges mainly come from economic fluctuations, technical risks, uncertainty of decision-maker’s subjective judgment. Troubled by these uncertain factors, how we can accurately evaluate new drug R&D projects is a very urgent and necessary problem for the management of firms. In this paper, we present a new value model on a compound real option to evaluate the new drug R&D project under economic fluctuations, technical risks and subjective uncertainty. The randomness and fuzziness of economic fluctuations are modeled by a standard fractional Brownian motion and a trapezoidal fuzzy stochastic process, respectively. The technical risks are expressed by a Poisson-type jump process, which allows for the catastrophic impact of the technical risk and thus abandonment of the new drug R&D project. The uncertainty of decision-maker’s subjective judgment is characterized by a mean value with the possibility–necessity weight, the pessimistic–optimistic index and the fuzzy risk aversion index. By using the real options approach, we achieve analytic solutions for the value models of new drugs R&D projects. A case study and analysis is also employed to emphasize the practical application of this innovative value model. We show that the uncertainties have a significant impact on the new drug R&D option value to some extent. Moreover, from the case of sensitivity analysis, some results are presented to illustrate that the value of new drug R&D project is increasing with respect to the right fuzzy factor and decreasing with respect to the left fuzzy factor, the technical risk of discovery phase, the technical risk of pre-clinical phase and the technical risk of clinical phase.

Cryptocurrency and Innovation: The Relationship with Technology in Light of Risk Aversion and Market Sentiment

The paper performs a (Panel) Moderated Regression, Causality and Cointegration (complete version) test on the relationship between the exchange rate of major selected cryptocurrencies vs. major fiat currencies, and selected technology indices of various geographic areas and economic groups in the world, representative of different countries or areas in the world (Europe) and for different levels of market capitalization. The dataset allows to focus on the comparison pre- and post-Covid19 (complete version), testing the relationship in those two different time frames. The novelty of the study is the use of risk aversion and VIX volatility index (market sentiment) as control variables. Various indices of risk aversion have been developed, presenting different levels of trade-off in terms of availability (ease of calculation) and effectiveness. A good candidate seems to be the Global Risk Appetite Index (GRAI) by Kumar and Persaud (2002). As for the VIX index, it has been widely used as a proxy of market sentiment, but rarely applied to the understanding of currency trends (especially cryptocurrency). Our expectation is to observe some significant moderation effect for some of the indicators considered, in general and when observing the data for different sub-periods. with investors probably trying to hedge equity investments and diversify their portfolios differently, with risk aversion and VIX index to be a driving factor of those choices. We also expect results to be confirmed by the Causality and Cointegration (complete version) test. The paper aims to contribute to the Fintech literature and shed light on the possibilities of diversification offered by tech-related portfolios. As a corollary, it aims to determine how the effect of risk aversion and general market risk sentiment drives those choices. Keywords: Cryptocurrency; Technology Index; Risk Appetite; Market Sentiment; Causality; Cointegration; Panel Regression.

Intertemporal consumption and debt aversion: a replication and extension

We replicate Meissner (Exp Econ 19:281–298, 2016), where debt aversion was reported for the first time in an intertemporal consumption and saving problem. While Meissner (2016) uses a German sample, our participants are US undergraduate students. All of the original study’s main findings replicate with similar effect sizes. Additionally, we extend the original analysis by introducing a new individual index of debt aversion, which we use to compare debt aversion across countries. Interestingly, we find no significant differences in debt aversion between the original German and the new US sample. We then test whether debt aversion correlates with individual characteristics such as gender, cognitive reflection ability, and risk aversion. Overall, this paper confirms the importance of debt aversion in intertemporal consumption and saving problems and validates the approach of Meissner (2016).

Characterization of Beekeepers and Their Activities in Seven European Countries

Beekeeping is an ancient activity that is gaining interest among practitioners and society in general. It is as an activity with positive impacts in the environmental, social and economic spheres, with the potential to reconnect these dimensions and contribute to sustainable development. Thus, it is important to determine the profiles of beekeepers across the world, and to understand the main social, economic or ecological drivers that shape their activities. Hofstede cross-cultural dimensions were used to better explain differences between countries. A survey was undertaken of beekeepers in different countries (Croatia, Estonia, Finland, Italy, Norway, Portugal, and Spain) in the native language of each nation. A total of 313 questionnaires, using an online platform or in paper form, was delivered face-to-face during training or dissemination events in 2019. Norway and Finland were the countries with the highest percentage of respondents with a university degree (>80%), while Spain (42%) and Croatia (48%) presented the lowest percentages. Most participants were experienced beekeepers (59% had more than five years of experience) with more than 50 colonies. With the exception of Italy, beekeeping appears to be a hobby or an additional professional activity. The main beekeeping products for these beekeepers were honey, wax, colonies and propolis, with an average honey production per season of 24.5 kg/hive. Crossing socio-demographic characteristics and Hofstede cross-cultural dimensions showed a relation among countries with higher Power Distance Index (PDI; this value expresses how society accepts and expects a certain inequality of power) and lower annual income and educational level (Croatia, Portugal, and Spain). A strong correlation appeared between Masculinity Femininity Index (MFI; this value refers to gender effects in society, with feminine societies meaning that the dominant values are caring for others and quality of life, as opposed to masculine societies, which are driven by competition, achievement and success) and age, income and education, with Norway presenting the most feminine society, with more educated and older beekeepers. The Uncertainty Aversion Index (UAI; this value explains how members of a society feel when dealing with unknown situations) was strongly associated with education. The results showed that increasing beekeepers’ income will contribute to balancing the distribution of power among members of society, and that this might be achieved by training, especially in Croatia, Portugal, Spain, and Italy.

Dual Moments and Risk Attitudes

The well-known Pratt–Arrow approximation, developed independently by John W. Pratt and Kenneth Arrow, provides an insightful dissection of the risk premium under the expected utility (EU) model. It is given by one-half the product of the variance of the risk and the local index of absolute risk aversion of the decision maker. Quite surprisingly, despite many important developments on “global” risk aversion in non-EU models, the “local” approach to risk aversion has received little attention outside EU. By considering the first two dual moments, mean and maxiance, on equal footing with the first two primal moments, mean and variance, the authors develop a dissection of the risk premium under the popular rank-dependent utility (RDU) model. This yields a simple approximation to the risk premium and a local index of absolute risk aversion under the RDU model.

Time-varying relationship between conventional and unconventional monetary policies and risk aversion: international evidence from time- and frequency-domains

This paper analyzes the time-varying relationship between risk aversion and both conventional and unconventional monetary policy in an international context and at different frequencies using a wavelet coherency analysis. Our main results suggest the existence of a dynamic relationship between the two variables depending on timescales and on the periods. Thus, a short-run negative relationship leading from the risk aversion variable to the monetary policy measure is found for most of the period, suggesting that monetary policy reacts more aggressively in periods of high risk aversion. Furthermore, during the financial crisis, we find a long-run negative relationship leading from the monetary policy to the risk aversion index, suggesting that a lax monetary policy could lead to financial instability. US monetary policy has also significant effects on the risk aversion rates in the Euro Area, Japan and the UK.

Robust experimentation in the continuous time bandit problem

We study the experimentation dynamics of a decision maker (DM) in a two-armed bandit setup (Bolton and Harris (1999)), where the agent holds ambiguous beliefs regarding the distribution of the return process of one arm and is certain about the other one. The DM entertains Multiplier preferences a la Hansen and Sargent (2001), thus we frame the decision making environment as a two-player differential game against nature in continuous time. We characterize the DM value function and her optimal experimentation strategy that turns out to follow a cut-off rule with respect to her belief process. The belief threshold for exploring the ambiguous arm is found in closed form and is shown to be increasing with respect to the ambiguity aversion index. We then study the effect of provision of an unambiguous information source about the ambiguous arm. Interestingly, we show that the exploration threshold rises unambiguously as a result of this new information source, thereby leading to more conservatism. This analysis also sheds light on the efficient time to reach for an expert opinion.

Beyond Uncertainty Aversion

Although much of the theoretical literature on ambiguity works under the assumption of uncertainty aversion, experimental evidence suggests that it is not a universal behavioral trait. This paper introduces and axiomatises the family of α-UA (for α-Uncertainty Attitude) preferences: a simple extension of the family of uncertainty averse preferences (Cerreia-Vioglio et al., 2011b) with a Hurwicz-style mixing coefficient, so as to admit a richer range of uncertainty attitudes. The parameters of the model are uniquely identified in our characterisation. This provides, in the Hurwicz α-maxmin EU special case, a new resolution of a long-standing identification problem for this model. Moreover, it yields novel models as special cases, including extensions of variational and multiplier preferences (Maccheroni et al., 2006; Hansen and Sargent, 2001) beyond the assumption of uncertainty aversion. Comparative statics support the interpretation of the mixing coefficient as an index of imprecision aversion. In a standard portfolio problem, the model yields the intuitive relationship between imprecision aversion and investment in an uncertain asset: as the former increases, the latter decreases.

Losses loom larger than gains and reference dependent preferences in Bernoulli’s utility function

Some analysts claim that Bernoulli’s utility function is “reference-independent”, so it is not able to generate a loss aversion index, and that the theoretical framework of Prospect Theory (PT) is required to achieve those results. This paper examines that claim and finds that the geometry of Bernoulli’s original utility function specification either explains or implies key elements of PT: reference dependence and a loss aversion index. Theory and evidence show that the loss aversion index constructed from reference wealth in Bernoulli’s utility specification is in the domain of attraction of a stable law. That is, its distribution is a slow varying function with a fat tail that decays like a power law. Additionally, the index can be tested with a modified Fisher z-transform test. Bernoulli‘s utility function also sheds light on why loss aversion may be over-estimated under PT. In a nutshell, Bernoulli’s utility function is alive and well.

Robust Experimentation in the Continuous Time Bandit Problem

We study the experimentation dynamics of a decision maker (DM) in a two-armed bandit setup (Bolton and Harris [1999]), where the agent holds ambiguous beliefs regarding the distribution of the return process of one arm and is certain about the other one. The DM entertains Multiplier preferences a la Hansen and Sargent [2001], thus we frame the decision making environment as a two-player differential game against nature in continuous time. We characterize the DM's value function and her optimal experimentation strategy that turns out to follow a cut-off rule with respect to her belief process. The belief threshold for exploring the ambiguous arm is found in closed form and is shown to be increasing with respect to the ambiguity aversion index. We then study the effect of provision of an unambiguous information source about the ambiguous arm. Interestingly, we show that the exploration threshold rises unambiguously as a result of this new information source, thereby leading to more conservatism. This analysis also sheds light on the efficient time to reach for an expert opinion.

Risk aversion connectedness in five European countries

In this paper we compute an aggregate index of risk aversion and indices of vulnerability and the contribution to systemic risk aversion for five European countries. The variance risk premium proxies risk aversion. The contribution to the literature is twofold. First, this is the first study estimating not only the common component, but also indices of directional connectedness among variance risk premia. Second, it is the first to estimate the interconnections by means of a FIVAR model, in order to account for long memory. Our analysis indicates measures of total and directional connectedness unlike those that would be obtained with the use of a short memory VAR. These differences arise when the focus is on market turmoil periods and on forecast horizons of thirty days. Future research evaluating spillovers among long memory series can benefit from our results. Policy-makers should take these interconnections into account when adopting effective macroeconomic policies.

DIRECTIONAND INTENSITYOF RISK PREFERENCEATTHE THIRD ORDER

ABSTRACTIn expected utility theory, aversion to risk, greater aversion, and the desire to substitute away from risk are each characterized by properties of the Arrow–Pratt index of absolute risk aversion, with comparative statics implications for such decisions as saving. At the third order, however, no single index suffices. We contrast alternative indices of third‐order risk preference and show that the substitution effect of downside risk is governed by the Schwarzian, and that where the degree of prudence governs the magnitude of precautionary saving, the Schwarzian governs the effect of background risk on the marginal rate of time preference.

Evaluating the Role of Three Basic Factors of Prospect Theory in Decision Making

The main aim of this paper is to empirically evaluate the role of three significant factors of the Prospect Theory: the S-shaped value function, the loss aversion, and the distortion of probability, in decision making. In order to do this, a general behavioral reward-risk model is firstly setup and an empirical evaluation about the role of each of these factor, separately and in interaction, on the optimal solutions of the problem follows. For the analysis, well known US equity portfolios consisting by stocks listed in NYSE, AMEX, and NASDAQ formed on investment style are employed. The findings indicate that agents differentiate their behavior according to their type of preferences and their loss aversion level but they seem to always prefer high positively skewed assets such as small and value stocks. The attractiveness of positively skewed assets is re-enforced when probability distortion is introduced in the model. The introduction of probability distortion also affects the optimal perspective values of the problem increasing significantly their magnitude. After that, results show that as loss aversion increases agents tend to follow more conservative strategies, with and without probability distortion, while the value functional form has also its role in the model; bounded value functions as the negative exponential function drives agents to more conservative behaviors while unbounded value functions as the piecewise power function give the incentive to agents to undertake great risks and follow more aggressive strategies. The examination of the interaction of these factors indicate that the combination of an unbounded value functional form with a large loss aversion index may reduce agents' aggressiveness and limit (but not alter) the value functional form effect on optimal solutions.

Estimating Option-implied Risk Aversion for Indian Markets

What do nearly 1.5 lakh observations of options data say about risk preferences of Indian investors? This paper explores a nonparametric technique to compute probability density functions (PDFs) directly from NIFTY 50 option prices in India, based on the utility preferences of the representative investor. Use of probability density functions to estimate investor expectations of the distribution of future levels of the underlying assets has gained tremendous popularity over the last decade. Studying option prices provides information about the market participants’ probability assessment of the future outcome of the underlying asset. We compare the forecast ability of the risk-neutral PDF and risk-adjusted density functions to arrive at a unique index of relative risk aversion for Indian markets. Results indicate that risk-adjusted PDFs are reasonably better forecasts of investor expectations of future levels of the underlying assets. We find that Indian investors are not neutral to risk, contrary to the theoretical assumption of risk-neutrality among investors. The computed time-series of relative risk aversion overcomes the limitations of the VIX (implied volatility index) to yield a more reliable index, particularly useful for the Indian markets. Validity of the computed index is established by comparing with existing measures of risk and the relationships are found to be consistent with market expectations.