Risk aversion under preference uncertainty

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. Keywords: Risk Aversion , Preference Uncertainty , Risk-taking , Asset Allocation JEL Classification: D81, D84, G11 This Version: November 25, 201

Explaining Hedge Fund Investment Styles by Loss Aversion

Recent research reveals that hedge fund returns exhibit a range of different,possibly non-linear pay-off patterns. It is difficult to qualify all these patternssimultaneously as being rational in a traditional framework for optimal financial decisionmaking. In this paper we present a simple model based on loss aversion that can accommodatefor all of these pay-off structures in one unifying framework. We provide evidence thatloss-aversion is a likely assumption for management as well as investor preferences.Following the current empirical literature, we solve a static asset allocation problem thatincludes a nonlinear instrument. We show analytically that four different pay-off functionsmay be rationally optimal. The key parameter in determining which of these four to choosein a specific setting, is the financial planner's surplus. The notion of surplus connectshedge fund manager's incentive schemes with the idea of mental accounting as proposed inrecent behavioral finance research

Analytic Decision Rules for Financial Stochastic Programs

Contemporary financial stochastic programs typically involve a trade-offbetween return and (downside)-risk. Using stochastic programming we characterize analytically (rather than numerically) the optimal decisions that follow from characteristic single-stage and multi-stage versions of such programs. The solutions are presented in the form of decision rules with a clear-cut economic interpretation. This facilitates transparency and ease of communication with decision makers. The optimal decision rules exhibit switching behavior in terms of relevant state variables like the assets to liabilities ratio. We find that the model can be tuned easily using Value-at-Risk (VaR) related benchmarks. In the multi-stage setting, we formally prove that the optimal solution consists of a sequence of myopic (single-stage) decisions with risk-aversion increasing over time. The optimal decision rules in the dynamic setting therefore exhibit identical features as in the static context

Real-Estate Agent Commission Structure and Sales Performance

Do higher real-estate agent fees imply better performance? This study uses a nation-wide data set of residential real-estate transactions in the Netherlands from 1985 to 2011 to provide evidence against this. Brokers with a flat-fee structure who charge an up-front fee (which is substantially lower than the average fee of traditional brokers) and leave the viewings to the seller sell faster and at - on average - 2.7 percent higher prices. We correct for fixed house- and time effects. We provide additional evidence that the price dfference is not due to a seller-selection effect

The Effect of the Theo van Gogh Murder on House Prices in Amsterdam

This paper estimates the impact of the murder of film maker Theo van Gogh on November 2, 2004, on listed house prices in Amsterdam with a unique dataset. We use an hedonic-market approach to show that general attitudes towards Muslim minorities were negatively affected by the murder. Specifically, we test for an effect on listed house prices in neighborhoods where more than 25% of the people belong to an ethnic minority from a Muslim country (type I). Relative to the other neighborhoods, house prices in type I neighborhoods decreased by on average 3%, with a widening gap over time. The results are robust to several adjustments including changes in the control group. There is no significant difference in the time it takes for houses to be sold in type I versus other neighborhoods. Finally, people belonging to the Muslim minority were more likely to buy and less likely to sell a house in a type I neighborhood after the murder than befor

Efficiency Gains of a European Banking Union

An anticipated benefit of the prospective European Banking Union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority would follow a supranational approach, under which domestic and cross-border effects within Europe are incorporated. Using a model of recapitalising banks, this paper develops indicators to measure the efficiency improvement of resolution. Next, these efficiency indicators are applied to the hypothetical resolution of the top 25 European banks, which count for the vast majority of cross-border banking in Europe. Our cost-benefit analysis indicates that the UK, Spain, Sweden, and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe’s Banking Union

The Middle: The middle class as the moral core of society

For the first time in history, more than half of the world’s population belongs to the middle class. Global poverty has declined rapidly due to globalisation and technological development. But the same trends also lead to rapid change and the feeling that society is moving away from its moral core. In this book, the middle class in the Netherlands and Europe is highlighted by several authors and from several points of view. How is the middle class doing? What problems do families experience? What power lies in the civil society? And what does this mean for politics