Return Uncertainty Research Articles

Risk aversion over price variability: experimental evidence

ABSTRACT Eliciting risk attitudes is of crucial importance in economics. We test whether the degree of risk aversion that an individual exhibits in the context of the direct utility function is equivalent to that elicited in the context of the indirect utility function, as implied by duality theory. Our lab experiment uses payoff-based lottery choices (which are based on the direct utility function) and equivalent price-based lottery choices (which are based on the indirect utility function). We reject the equivalence of risk preferences from these two contexts. Subjects are more sensitive to price uncertainty than to equivalent payoff uncertainty.

A Local Market Mechanism for Physical Storage Rights

This paper proposes a two-stage auction-based local market mechanism to allocate physical storage rights (PSRs). As a market product, PSRs are provided by a storage owner and enable the local market participants (including renewable producers, consumers and prosumers) to access the storage. That is, they can book storage in the form of PSRs and dispatch it at a given time aiming to maximize their utility function. The business options we examine to evaluate the position of storage in the market range from storage owner entirely participating in day-ahead (DA) and real-time (RT) markets as an inter-temporal arbitrager, to exclusively acting as a PSR provider in DA only – this way, the storage owner is fully paid upfront in DA. Considering the context above, we propose an equilibrium model where each player optimizes its operational objective. We prove that the equilibrium model can be substituted with an equivalent optimization formulation which clears the proposed market ensuring the same desirable market properties, such as efficiency and revenue adequacy. Results suggest that the certain revenues earned by the storage owner in DA when acting as a PSR provider is equal to its expected profit as a regular market participant, mitigating however its payoff uncertainty and resulting in the same economic return.

An Agent-Based Empirical Game Theory Approach for Airport Security Patrols

Airports are attractive targets for terrorists, as they are designed to accommodate and process large amounts of people, resulting in a high concentration of potential victims. A popular method to mitigate the risk of terrorist attacks is through security patrols, but resources are often limited. Game theory is commonly used as a methodology to find optimal patrol routes for security agents such that security risks are minimized. However, game-theoretic models suffer from payoff uncertainty and often rely solely on expert assessment to estimate game payoffs. Experts cannot incorporate all aspects of a terrorist attack in their assessment. For instance, attacker behavior, which contributes to the game payoff rewards, is hard to estimate precisely. To address this shortcoming, we proposed a novel empirical game theory approach in which payoffs are estimated using agent-based modeling. Using this approach, we simulated different attacker and defender strategies in an agent-based model to estimate game-theoretic payoffs, while a security game was used to find optimal security patrols. We performed a case study at a regional airport, and show that the optimal security patrol is non-deterministic and gives special emphasis to high-impact areas, such as the security checkpoint. The found security patrol routes are an improvement over previously found security strategies of the same case study.

Contracting under uncertainty: Groundwater in South India

To quantify contracting distortions in a real‐world market, we develop and structurally estimate a model of contracting under payoff uncertainty in the south Indian groundwater economy. Uncertainty arises from unpredictable fluctuations in groundwater supply during the agricultural dry season. Our model highlights the tradeoff between the ex post inefficiency of long‐term contracts and the ex ante inefficiency of spot contracts. We use unique data on both payoff uncertainty and relationship‐specific investment collected from a large sample of well‐owners in Andhra Pradesh to estimate the model's parameters. Our estimates imply that spot contracts entail a 3% efficiency loss due to hold‐up. Counterfactual simulations also reveal that the equilibrium contracting distortion reduces the overall gains from trade by about 4% and the seasonal income of the median borewell owner by 2%, with proportionally greater costs borne by smaller landowners.

Accounting Information, Disclosure and Expected Utility: Do Investors Really Abhor Uncertainty?

Investors are said to abhor uncertainty, but if there were no uncertainty they could earn only the risk-free rate. A fundamental result in the analytical accounting literature shows that investors buying into a CARA-normal CAPM market pay lower asset prices, earn higher expected returns, and obtain higher expected utility, when the market payoff has higher variance. New investors obtain similar welfare gains from risk under a log/power utility CAPM. These results do not imply that investors abhor To realize investors' ex ante expectations, the subjective probability distributions representing market expectations must be accurate. Greater payoff risk can add to investors' expected utility, but higher ex post (realized) utility comes from better information and more accurate ex ante expectations. An important implication for accounting is that greater disclosure can have the simultaneous effects of (i) exposing more accurately firms' payoff uncertainty and thereby increasing new investors' expected utility, and (ii) improving market estimates of firms' payoff parameters (means, variances, covariances), thereby giving investors a better chance of realizing their expectations. Paradoxically, better information can be valuable to new investors by exposing more accurately the uncertainty in firms' business operations and results. New investors maximizing expected utility typically want both more uncertainty and better information.

Preliminary study for implementation of voluntary delivery points of expanded polystyrene: a case in southern Brazil

Abstract Paper aims The purpose of the study is to present a proposal for implementation of Voluntary Delivery Points (VDP) of expanded polystyrene (EPS) in Florianopolis city, Brazil. Originality Transportation, uncertainty of financial return, and lack of population's awareness are barriers for EPS recycling. This paper seeks to overcome these difficulties to give a better destination for EPS other than landfill. A method is proposed for the implementation of VDP to receive this type of waste. As far as the authors know, no previous research has proposed this analysis for Styrofoam® RL. Research method The research method consists of a survey application with the population and spatial analysis using heat maps of the public equipment on QGIS® software. Main findings It was possible to verify the generation capability of EPS waste in Florianopolis, the lack of population’s awareness about EPS recycling, and suitable points for the implementation of VDP to aid in the RL. Implications for theory and practice This paper seeks to encourage researchers and practitioners to develop solutions for EPS RL. The main contribution of this article is presenting a practical alternative method that aims to overcome one of the main barriers of EPS RL, which is low-density waste transportation, dealing with consumer's responsibility for the waste generated, their awareness on the issue and their active contribution to a proper destination of EPS waste.

Impact of exchange rate on uncertainty in stock market: Evidence from Markov regime-switching GARCH family models

We employ the Markov Regime-Switching GARCH (MRS- GARCH) family models under the normal, Student’s t-, and GED distributions to measure the uncertainty of the industry index returns (IIR) of Tehran...

Asymmetric effects of oil price uncertainty on corporate investment

Using a comprehensive data set of a large panel of US firms over 1984–2017, we show that the negative effect of crude oil price return uncertainty on investments is asymmetric. In particular, we show that investment is more significantly reduced following the volatility of positive oil price changes than that of negative changes, and this asymmetric effect is more pronounced in small firms. In addition, we find that the asymmetric effect is stronger in the crude oil- and gas-producing companies where the effect of the volatility of negative oil price changes is greater than that of positive oil price changes. We also find that the impact of positive or negative oil price change uncertainty on investments substantially differs across different industries. The results are quite robust to the way in which we measure the investment and oil price uncertainty and to alternative regression methods.

Refinements and higher-order beliefs: a unified survey

This paper presents a simple framework that allows us to survey and relate some different strands of the game theory literature. We describe a “canonical” way of adding incomplete information to a complete information game. This framework allows us to give a simple “complete theory” interpretation (Kreps in Game theory and economic modelling. Clarendon Press, Oxford, 1990) of standard normal form refinements such as perfection, and to relate refinements both to the “higher-order beliefs literature” (Rubinstein in Am Econ Rev 79:385–391, 1989; Monderer and Samet in Games Econ Behav 1:170–190, 1989; Morris et al. in Econ J Econ Soc 63:145–157, 1995; Kajii and Morris in Econ J Econ Soc 65:1283–1309, 1997a) and the “payoff uncertainty approach” (Fudenberg et al. in J Econ Theory 44:354–380, 1988; Dekel and Fudenberg in J Econ Theory 52:243–267, 1990).

High Involvement and Ethical Consumption: A Study of the Environmentally Certified Home Purchase Decision

Sustainable and energy efficient (SEE) attributes in the housing market have become a focus in Canada. Similarly, understanding the consumer’s decision-making process of this high-involvement ethical product has become a burgeoning area for researchers. This study describes the development of the subject, highlighting the nature of the ethical decision-making process and how it relates to this known intention–behaviour gap. An observation, followed by two studies consisting of in-depth interviews with real estate agents and sales representatives (n = 15) and home purchasers/consumers (n = 15), were conducted. Transcriptions were analysed qualitatively with NVivo Pro 12 software (NVivo Pro 12, QSR International Pty Ltd, Melbourne, Australia). Inductive thematic analysis revealed two main driving themes: information and trust in seller/realtor. Attribute investment return uncertainty was identified as a theme that affects the strength of the relationship between purchase intention and behaviour, whereas the trust in seller/realtor speaks to how and why this effect occurs. The findings present relationships among the driving factors that were identified by realtors and consumers in the SEE housing market, as well as barriers (investment return uncertainty) that prevent consumers from purchasing high-involvement ethical products.

Hybrid artificial intelligence and robust optimization for a multi-objective product portfolio problem Case study: The dairy products industry

The optimization of the product portfolio problem under return uncertainty is addressed here. The contribution of this study is based on the application of a hybrid improved artificial intelligence and robust optimization and presenting a new method for calculating the risk of a product portfolio. By applying an improved neural network with runner root algorithm (RRA), the future demand of each product is predicted and the risk index of each product is calculated based on its predicted future demand. A two-objective (minimizing risk and maximizing return) mathematical model is proposed where, the effect of investments, reliability and allowable lost sales on the designed product portfolio are of concern. Due to the return uncertainty, two robust counterpart models based on the Bertsimas and Sim and Ben-Tal and Nemirovski approaches are developed. Then, an exact solution method is proposed to reduce the solving time of robust model. The results of the implementation in the dairy industry of Iran indicate that an increase in the confidence level, increase the investment risk and decrease the total return. The obtained results by the statistical tests indicate that the two newly proposed robust models are of similar performance in the finding the maximum return solutions, while, here the least risky solutions, the Bertsimas model outperforms its counterparts. Moreover, the results of the proposed exact solution method indicate that this method reduces the execution time by an average of 3%, indicative of proposed method effectiveness.

Multi-period and Multi-objective Stock Selection Optimization Model Based on Fuzzy Interval Approach

The optimization of investment portfolios is the most important topic in financial decision making, and many relevant models can be found in the literature. According to importance of portfolio optimization in this paper, deals with novel solution approaches to solve new developed portfolio optimization model. Contrary to previous work, the uncertainty of future returns of a given portfolio is modeled using LR-FUZZY numbers while the function of its return are evaluated using possibility theory. We used a novel Lp-metric method to solve the model. The efficacy of the proposed model is tested on criterion problems of portfolio optimization on LINGO provides a framework to optimize objectives when creating the loan portfoliso, in a search for a dynamic markets decision. In addition to, the performance of the proposed efficiently encoded multi-objective portfolio optimization solver is assessed in comparison with two well-known MOEAs, namely NSGAII and ICA. To the best of our knowledge, there is no research that considered NSGAΠ, ICA fuzzy simultaneously. Due to improve the performance of algorithm, the performance of this approach more study is probed by using a dataset of assets from the Iran’s stock market for three years historical data and PRE method. The results are analyzed through novel performance parameters RPD method. Thus, the potential of our comparison led to improve different portfolios in different generations.

Experimental Asset Markets with An Indefinite Horizon

We study indefinitely-lived assets in experimental markets and find that the traded prices of these assets are on average about 40\% of the risk neutral fundamental value. Neither uncertainty about the value of total dividend payments nor horizon uncertainty about the duration of trade can account for this low traded price, while the temporal resolution of payoff uncertainty plays a crucial role. We show that an Epstein and Zin (1989) recursive preference specification together with probability weighting can rationalize the low traded prices observed in our indefinite-horizon asset markets, while risk attitudes do not play such an important role.

KVA, Mind Your P's and Q's!

There is an increasing consensus within banks on the need to recognize the impact of rising capital requirements on their derivative business in the form of capital valuation adjustment (KVA). There are still concerns over how exactly KVA should be calculated, charged, and managed. We analyze the aspects of the costs arising due to holding of counterparty credit risk capital. This study demonstrates that banks which are careless with their KVA method and ignore actively managing it, can rake a significant loss and will eventually increase uncertainty in the shareholders' return on capital.

REMANUFACTURING WITH PATENTED TECHNIQUE ROYALTY UNDER ASYMMETRIC INFORMATION AND UNCERTAIN MARKETS

We study a dual-channel recycling closed-loop supply chain (CLSC) and investigate the royalty strategy involving cost-reducing technique for remanufacturing patented products. Facing information asymmetry and market uncertainty, we address the problem where the patent licensor (manufacturer) and licensee (remanufacturer) simultaneously compete in the sales market and the recycling market. We examine the optimal decisions of a decentralized CLSC (D-CLSC) with the manufacturer being the Stackelberg leader. Numerical examples are used to demonstrate how the patented technology (cost-reducing technique) affects the channel players’ behaviors and how to identify the optimal royalty fee. Based on the theoretical derivation and the numerical outcomes, we find that regardless of the CLSC structure (centralized or decentralized), the take-back prices and the total profits will rise with the increase of savings from the licensed technology. In the D-CLSC, (i) the expected profits of the manufacturer and the remanufacturer as well as the royalty fee will also rise with the savings from the licensed technology. (ii) In addition, the wholesale price, retail price, take-back prices, as well as the royalty fee will rise with the degree of information asymmetry. But the retailer’s expected profit will decline. (iii) Finally, the expected profit of the manufacturer will rise with the demand uncertainty and the return uncertainty. For the remanufacturer, this trend is not obvious. Our research provides guidance to resolve conflicts and intellectual property disputes between the original manufacturer and the remanufacturer of the patented product.

Market transparency and international real estate investment

PurposeThe purpose of this paper is to provide new empirical evidence on the important role of market transparency in international real estate investment.Design/methodology/approachThe authors apply the augmented panel regression method (or the correlated random effects approach) by using national panel data from 44 countries from 2004 to 2016.FindingsCountries with better accessibility to market information and higher enforceability of regulations have less information asymmetry and attract more inward real estate investment. In contrast, the accounting quality of corporate governance is negatively correlated with investment, indicating the possibility that foreign investors enjoy high excess returns by investing in real estate in countries with poor accounting quality.Practical implicationsCountries lacking market transparency can increase inward investments by providing richer market information to foreign investors and by boosting enforceability of regulation to mitigate the uncertainty of returns on investment. Investors and public sectors in countries facing a saturated real estate market may expand investment by investigating less-explored markets and by seeking bilateral negotiations to secure higher predictability of return on investment in targeted countries.Originality/valueThe authors utilize updated multiple transparency indices instead of a conventional aggregate index to examine how the investment is attributed to different aspects of market transparency and employ the augmented panel regression method for investigation of the intra- and international determinants of the investment.

Prognosis of product take-back for enhanced remanufacturing

Remanufacturing reduces final wastes to sinks, extraction of virgin materials and pollution from production processes by reinstating products taken back by end-users to satisfy part of overall demand. Product returns are delayed and possibly limited in periods of fast growth and excessive in the aftermath. Varying growth/demand and volatile take back by consumers and industrial end-users introduce uncertainty, regarding quantity and quality of returns. As remanufacturing expands, escalating competition for acquisition of high quality returns exacerbates uncertainty. Production planning and control for efficient remanufacturing depends on reliable prediction of quantity and quality of returns. A method is developed for prognosis of product return quantity and quality grades, as reflected by vintage flows. It is anchored on a law relating stock and end-of-life level, under random losses and arbitrary end-of-life distribution. Efficacy is tested via a model that describes stock and flows in reuse/remanufacturing, allowing for varying demand, random stock losses, random product returns with time-varying distributions and time-varying utilisation of product returns. Realisations are obtained by Marko-chain Monte-Carlo simulation. Inherently integral in nature, using scaled data and founded on rigorous balances, the method enables prognosis of returns and age-vintage flows, under realistic conditions, including unknown nonlinearities and non-stationarities. It features improved performance (mean absolute error less than one half) compared to leading methods in-use that employ black-box models with error-driven parameter adaptation (e.g. regression). Efficacy is particularly high at crucial peaks and lows (shortage or surplus periods) enabling resourceful planning of acquisition and inventory control of product returns towards sustainability.

On the Asset Market View of Exchange Rates

Abstract If the asset market is complete, then the difference between foreign and domestic agents’ log intertemporal marginal rates of substitution (IMRSs) equals the log change in the real exchange rate. This equation is frequently used to argue that changes in real exchange rates reflect differences between agents’ required compensation for exposure to asset return uncertainty. We show that the relative returns on frictionlessly traded assets are only reflected in the common component of agents’ IMRSs, not in differences. Instead, when this equation does offer insights, frictions in the goods market are the source of economic distinction between agents. Received December 10, 2013; editorial decision November 5, 2018 by Editor Geert Bekaert. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Preference-based evolutionary multi-objective optimization for portfolio selection: a new credibilistic model under investor preferences

We propose a new credibility portfolio selection model, in which a measure of loss aversion is introduced as an objective function, joint to the expected value of the returns and the below-mean absolute semi-deviation as a risk measure. The uncertainty of the future returns is directly approximated using the historical returns on the portfolios, so the uncertain return on a given portfolio is modeled as an LR-power fuzzy variable. Quantifying the uncertainty by means of a credibility distribution allows us to measure the investors’ loss aversion as the credibility of achieving a non-positive return, which is better perceived by investors than other measures of risk. Furthermore, we analyze the relationships between the three objective functions, showing that the risk measure and the loss aversion function are practically uncorrelated. Thus, the information provided by these criteria do not overlap each other. In order to generate several non-dominated portfolios taking into account the investor’s preferences and that the problem is non-linear and non-convex, we apply up to three preference-based EMO algorithms. These algorithms allow to approximate a part of the Pareto optimal front called region of interest. We analyze three investor profiles taking into account their loss-adverse attitudes: conservative, cautious and aggressive. A computational study is performed with data of the Spanish stock market, showing the important role played by the loss aversion function to generate a diversified set of non-dominated portfolios fitting the expectations of each investor.

Interactive Impact of Demographic Variables and Personality Type on Risk Tolerance

Investors’ investment decision is much dependent on his/her risk-taking capability, which in turn depends on a variety of factors. Majority of the studies carried out on this topic associate the financial risk tolerance (FRT) with demographics (gender, marital status, age, education income, etc.) of the investor. A handful of the studies on this topic establish a link between FRT and personality type. FRT refers to the investors’ ability to allow the uncertainty of returns while taking their investment decision. Most of the past studies on the related topics have taken Myers-Briggs Type Indicators (MBTI) or big five personality types, whereas the present study has taken Personality type A and B for finding its association with risk tolerance level. Identifying Personality type A and B is much easier and less time-consuming as compared to other models. Hence, in real life, financial planners also can use the outcome of this study in preparing the investment strategy for their clients. Past studies have focused either on demographics or on personality type, while the current study combines the effect of both the variables and adds to the existing literature. The present study adopts a single cross-sectional descriptive research design. To satisfy the objective, required data were gathered through a structured questionnaire with a “Financial Risk Tolerance Scale,” “Personality Scale,” and basic demographic questions using a convenience sampling methodology. An analysis of data indicates that personality type and demographic variables such as gender, marital status, occupation, and income are found significant in determining FRT of investor, while age and education are found insignificant.