Impact of Investor’s Varying Risk Aversion on the Dynamics of Asset Price Fluctuations
نویسندگان
چکیده
While the investors’ responses to price changes and their price forecasts are well accepted major factors contributing to large price fluctuations in financial markets, our study shows that investors’ heterogeneous and dynamic risk aversion (DRA) preferences may play a more critical role in the dynamics of asset price fluctuations. We propose and study a model of an artificial stock market consisting of heterogeneous agents with DRA, and we find that DRA is the main driving force for excess price fluctuations and the associated volatility clustering. We employ a popular power utility function, U(c, γ) = c 1−γ −1 1−γ with agent specific and timedependent risk aversion index, γi(t), and we derive an approximate formula for the demand function and aggregate price setting equation. The dynamics of each agent’s risk aversion index, γi(t) (i=1,2,...,N), is modeled by a bounded random walk with a constant variance δ. We show numerically that our model reproduces most of the “stylized” facts observed in the real data, suggesting that dynamic risk aversion is a key mechanism for the emergence of these stylized facts.
منابع مشابه
Speculative Oil Demand and Crude Oil Price Dynamics: A TVP-VAR Approach
Significant decline in the slope of short-term oil supply and demand curves, along with the meaningful change in the degree of risk aversion in arbitrageurs encouraged us to test the time-varying effects of speculative demand on crude oil price dynamics over the period 1985-2016. Using a time-varying parameter vector autoregressive (TVP-VAR) model – with structural shocks identified by Killian ...
متن کاملThe Effects of Oil Price Shocks on Transitional Dynamics of Business Cycles in Iran: Markov Switching Model with Time Varying Transition Probabilities (MS-TVTP)
The business cycles are one of the most important economic indicators that they show the changes in economic activities during time. The study of business cycles is important because the understanding fluctuations in GDP and effective factors on these fluctuations help policy makers to plan better and more efficient. The main purpose of this paper is to investigate the effects of oil price shoc...
متن کاملTime-Varying Transmission Mechanism of Oil Shocks in the Global Crude oil Market: A TVP-VAR Approach
In this paper, we have utilized a time-varying parameter vector autoregressive model in order to examine the structural changes in the transmission mechanisms of oil price shocks in the global crude oil market over the period of 1985-2016. In this setting, the contemporaneous response of real oil price and crude oil production to flow oil supply shock, flow oil demand shock, and speculative dem...
متن کاملThe Time Variation in Risk Appetite and Uncertainty
We develop new measures of time-varying risk aversion and economic uncertainty that can be calculated from observable financial information at high frequencies. Our approach has four important elements. First, we formulate a dynamic no-arbitrage asset pricing model that consistently prices all assets under assumptions regarding the joint dynamics among asset-specific cash flow dynamics, macroec...
متن کاملMyopia, Time-Inconsistency, Survival and Bankruptcy in Financial Markets
What is the characterization of asset prices and investor’s behavior under myopic or time-inconsistent preferences? This paper investigates the characterization of financial market equilibrium when individuals are myopic or time-inconsistent. We consider an infinite horizon economy under certainty with two heterogeneous CRRA individuals, one good and one long-lived asset. The question of surviv...
متن کامل