Steinbacher, Matjaz (2009): Acceptable Risk in a Portfolio Analysis.
Download (667Kb) | Preview
A social network has been used to simulate how agents of different levels of risk aversion under different circumstances behave in financial markets when deciding between risk-free and a risky asset. This is done by a discrete time version evolutionary game of risk-loving and risk-averse agents. The evolutionary process takes place on a social network through which investors acquire information they need to choose the strategy. A significant feature of the paper is that first-order stochastic dominance is a key determinant of the decision-making, while second-order stochastic dominance is not, with the level of omniscience and preferences of agents also having a significant role. Under most of the circumstances, pure risk-aversion turns out to be dominated strategy, while pure risk-taking “almost” dominant.
|Item Type:||MPRA Paper|
|Original Title:||Acceptable Risk in a Portfolio Analysis|
|Keywords:||social networks, portfolio analysis, stochastic finance, stochastic dominance|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Z - Other Special Topics > Z1 - Cultural Economics; Economic Sociology; Economic Anthropology > Z13 - Economic Sociology; Economic Anthropology; Social and Economic Stratification
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
|Depositing User:||Matjaz Steinbacher|
|Date Deposited:||22. Feb 2009 02:27|
|Last Modified:||13. Feb 2013 05:49|
Arthur, Brian (2006). “Out-of-Equilibrium Economics and Agent-Based Modeling.” In Handbook of Computational Economics, Volume II: Agent-Based Computational Economics. Kenneth Judd and Leigh Tesfatsion (eds). Amsterdam: Elsevier. pp. 1551-1564.
Axelrod, Robert (1984). The Evolution of Cooperation. New York: Basic Books.
Banerjee, Abhijit (1992). “A Simple Model of Herd Behavior.” Quarterly Journal of Economics, Vol. 107, No. 3, pp. 797-818.
Banerjee, Abhijit (1993). “The Economics of Rumours.” Review of Economic Studies, Vol. 60, No. 2, pp. 309-327.
Barberis, Nicholas, Andrei Shleifer, and Robert Vishny (1998). “A Model of Investor Sentiment.” Journal of Financial Economics, Vol. 49, No. 3, pp. 307-343.
Barsky, Robert, and James Bradford De Long (1993). “Why Does the Stock Market Fluctuate?” Quarterly Journal of Economics, Vol. 108, No. 2, pp. 291-311.
Bikhchandani, Sushil, David Hirshleifer, and Ivo Welch (1998). “Learning from the Behavior of Others: Conformity, Fads, and Information Cascades.” Journal of Economic Perspectives, Vol. 12, No. 3, pp. 151-170.
Chambers, J, C. Mallows, and B. Stuck (1976). “A Method for Simulating Stable Random Variables.” Journal of American Statistical Assotiation, Vol. 71, pp. 340-344.
Cont, Rama, and Jean-Philipe Bouchaud (2000). “Herd Behavior and Aggregate Fluctuations and Financial Markets.” Macroeconomic Dynamics, Vol. 4, No. 2, pp. 170-197.
Fudenberg, Drew, and Jean Tirole (1994). Game Theory. MIT: MIT Press.
Granovetter, Mark (2005). “The Impact of Social Structure on Economic Outcomes.” Journal of Economic Perspectives, Vol. 19, No. 1, pp. 33-50.
Hayek, Friedrich August von (1945). “The Use of Knowledge and Society.” American Economic Review, Vol. 35, No. 4, pp. 519-530.
Kahneman, Daniel (2003). “Maps of Bounded Rationality: Psychology for Behavioral Economics.” American Economic Review, Vol. 93, No. 5, pp. 1449-1475.
Kahneman, Daniel, and Amos Tversky (1979). “Prospect Theory: An Analysis of Decision under Risk.” Econometrica, Vol. 47, No. 2, pp. 263-291.
Lukacs, Eugene (1970). Characteristic Functions. London: Griffin.
Lux, Thomas (1995). “Herd Behavior, Bubbles, and Crashes.” Economic Journal, Vol. 105, No. 431, pp. 881-896.
Mandelbrot, Benoit (1963a). “The Variation of Certain Speculative Prices.” Journal of Business, Vol. 36, No. 4, pp. 394-419.
Mandelbrot, Benoit (1963b). “New Methods and Statistical Economics.” Journal of Political Economy, Vol. 71, No. 5, pp. 421-440.
Mantegna, Rosario, and Eugene Stanley (1995). “Scaling Behavior in the Dynamics of an Economic Index.” Nature, Vol. 376, pp. 46-49. doi:10.1038/376046a0.
Markowitz, Harry (1952). “Portfolio Selection.” Journal of Finance, Vol. 7, No. 1, pp. 77-91.
Mises, Ludwig von (1949). Human Action: A Treatise on Economics. Yale: Yale University Press.
Rothschild, Michael, and Joseph Stiglitz (1970). “Increasing Risk: I. A Definition.” Journal of Economic Theory, Vol. 2, No. 3, pp. 225-243.
Rubinstein, Ariel (1998). Modeling Bounded Rationality. MIT: MIT Press.
Tversky, Amos, and Daniel Kahneman (1974). “Judgment under Uncertainty: Heuristics and Biases.” Science, Vol. 187, No. 4157, pp. 1124-1131.
Wasserman, Stanley, and Katherine Faust (1994). Social Network Analysis: Methods and Applications. Cambridge: Cambridge University Press.
Watts, Duncan, and Steven Strogatz (1998). “Collective Dynamics of Small World Networks.” Nature, Vol. 393, No. 4, pp. 440-442.
Weron, Rafal (2001). “Levy-Stable Distributions Revisited: Tail Index > 2 Does Not Exclude the Levy-Stable Regime.” International Journal of Modern Physics C, Vol. 12, No. 2, pp. 209-223.