Search results for "Expected utility hypothesis"
showing 10 items of 16 documents
Optimal hedging under biased energy futures markets
2020
Abstract Optimal futures hedging positions for those agents trying to maximize their expected utility will depend on their view about the evolution of the market and on how risk adverse they are. The most risk adverse agents will probably decide to full-cover their positions. But when a futures bias exists, hedgers with moderate or low degree of risk aversion can alter their strategy depending on the expected gains in futures markets. In our application to the UK natural gas market, we find a statistically significant time-varying negative futures bias that can be forecasted with confidence. As a result of this bias, most effective and best performing hedging strategies for moderate risk-av…
Portfolio performance evaluation with generalized Sharpe ratios: Beyond the mean and variance
2009
The main purpose of this paper is to present a theoretically sound portfolio performance measure that takes into account higher moments of the distribution of returns. First, we perform a study of the investor's preferences to higher moments of distribution within expected utility theory and discuss the performance measurement. To illustrate the investor's preferences to higher moments and the computation of a performance measure, we provide an approximation analysis of the optimal capital allocation problem and derive a formula for the Sharpe ratio adjusted for skewness of distribution. This performance measure justifies the notion of the Generalized Sharpe Ratio (GSR) introduced by Hodges…
EU income stabilization tool: potential impacts, financial sustainability and farmer’s risk aversion
2021
AbstractThe Income Stabilization Tool, a risk management scheme introduced within the Common Agricultural Policy (CAP) 2014–2020, could help European Union farmers manage the income risks they face. This study assesses the potential impact of implementing this tool through the maximum level of contribution to the fund which determines an indifference to participate in the fund and its financial sustainability. The study relies on an expected utility approach and assesses the variability of loss ratios over time using a sample of Italian hazelnut farms as a case study. The participation depends on the level of farmers' contributions and their degree of risk aversion. However, the CAP public …
Gender discrimination and intergenerational transmission of preferences
2004
This paper provides an explanation for the existence of gender discrimination in the labour market focusing on the intergenerational transmission of preferences related to the attitude of women towards jobs and family. Changes in women's preferences over generations depend on the socialization efforts of their parents which in turn are influenced by both the firm's expected recruitment policy and the expected utility from household care. We obtain two types of steady state equilibria: the discriminatory equilibrium, in which women are segregated to low-paid jobs, and the non-discriminatory equilibrium, in which women are hired in highly-paid jobs. The conditions of convergence to each equil…
Continuous-time portfolio optimization under terminal wealth constraints
1995
Typically portfolio analysis is based on the expected utility or the mean-variance approach. Although the expected utility approach is the more general one, practitioners still appreciate the mean-variance approach. We give a common framework including both types of selection criteria as special cases by considering portfolio problems with terminal wealth constraints. Moreover, we propose a solution method for such constrained problems.
Optimal control of option portfolios and applications
1999
We present an expected utility maximisation framework for optimally controlling a portfolio of options. By combining the replication approach to option pricing with ideas of the martingale approach to (stock) portfolio optimisation we arrive at an explicit solution of the option portfolio problem. Its characteristics are illustrated by some specific examples. As an application, we calculate an optimal option and consumption strategy for an investor who is obliged to hold a stock position until the time horizon.
Modelling agricultural risk in a large scale positive mathematical programming model
2020
International audience; Mathematical programming has been extensively used to account for risk in farmers' decision making. The recent development of the positive mathematical programming (PMP) has renewed the need to incorporate risk in a more robust and flexible way. Most of the existing PMP-risk models have been tested at farm-type level and for a very limited sample of farms. This paper presents and tests a novel methodology for modelling risk at individual farm level in a large scale model, called individual farm model for common agricultural policy analysis (IFM-CAP). Results show a clear trade-off between including and excluding the risk specification. Albeit both alternatives provid…
Obtaining the best value for money in adaptive sequential estimation
2010
Abstract In [Kujala, J. V., Richardson, U., & Lyytinen, H. (2010). A Bayesian-optimal principle for learner-friendly adaptation in learning games. Journal of Mathematical Psychology , 54(2), 247–255], we considered an extension of the conventional Bayesian adaptive estimation framework to situations where each observable variable is associated with a certain random cost of observation. We proposed an algorithm that chooses each placement by maximizing the expected gain in utility divided by the expected cost. In this paper, we formally justify this placement rule as an asymptotically optimal solution to the problem of maximizing the expected utility of an experiment that terminates when the…
Revealed preference and portfolio choice
1993
Abstract We show that the necessary and sufficient conditions for expected utility rationalizability of a single observed portfolio choice are identical to the necessary and sufficient conditions for non-expected utility rationalizability.
Investing for the Long Run
2017
This paper studies long term investing by an investor that maximizes either expected utility from terminal wealth or from consumption. We introduce the concepts of a generalized stochastic discount factor (SDF) and of the minimum price to attain target payouts. The paper finds that the dynamics of the SDF needs to be captured and not the entire market dynamics, which simplifies significantly practical implementations of optimal portfolio strategies. We pay particular attention to the case where the SDF is equal to the inverse of the growth-optimal portfolio in the given market. Then, optimal wealth evolution is closely linked to the growth optimal portfolio. In particular, our concepts allo…