Working Paper: CEPR ID: DP3832
Authors: Günter Franke; Martin Weber
Abstract: Portfolio choice and the implied asset pricing are usually derived assuming maximization of expected utility. In this Paper, they are derived from risk-value models that generalize the Markowitz-model. We use a behaviourally based risk measure with an endogenous or exogenous benchmark. If the risk measure is modelled by a negative HARA-function, then sharing rules are convex or concave relative to each other. A measure of heterogeneity of investors is derived. More heterogeneity (a) raises convexity/concavity of sharing rules and, thus, the need of investors to trade options, (b) increases convexity of the pricing kernel, (c) raises option prices relative to the price of the under-lying asset and (d) raises the variance and kurtosis of the risk-neutral probability distribution of the aggregate pay-off.
Keywords: asset pricing; convexity of pricing kernel; decision-making under risk; heterogeneity of investors
JEL Codes: D81; G11; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investor heterogeneity (G11) | convexity of sharing rules (C71) |
| investor heterogeneity (G11) | pricing kernel convexity (D41) |
| investor heterogeneity (G11) | option prices (G13) |
| investor heterogeneity (G11) | variance and kurtosis of the distribution (C46) |