The Model for Risk Averse Investors. Analysis of equilibrium price for risk averse agents. Risk aversion and wealth effects for salient and non-salient cases. Comparison of risk loving and risk averse equilibrium prices. The Model for Risk Loving Agents.
Аннотация к работе
The origin of salience comes from the Prospect Theory, its relation with salience will be discussed further in the first part of my work. In my work I would like to explain the mispricing of assets by expanding the model proposed by Bordalo, Gennaioli and Shleifer (2013) by modifying it for risk averse and risk loving agents and show the difference in results for all three types of agents, interpret wealth and risk aversion coefficient effects on the equilibrium price and add a discount factor for risk neutral agents in the model. Hence, the main objective of this work is to show that mispricing of salient assets is observed for all types of agents and the level of risk exposure influences the equilibrium price and the magnitude of mismatch between equilibrium price under salient assumption and rationally stated equilibrium price. The structure of the work is as follows: firstly, I would like to modify the model for Salient Theory in two periods for risk averse agents, hence solving the BGS (2013) expected utility for risk averse agents and observe the equilibrium price that will be compared with equilibrium price for risk neutral agents. Risk aversion implies that agents prefer certain outcomes with a particular expected value to uncertain outcomes with the same expected value. Hence agents avoid uncertain decisions with high risk this leads to the marginally diminishing utility function. Arrow (1971) and Pratt (1964) analyzed the twice-differentiable utility function, where the risk aversion coefficient is determined as the proportion between the second and the first derivatives.