SSRN Author: Xun Yu ZhouXun Yu Zhou SSRN Content
https://privwww.ssrn.com/author=1346587
https://privwww.ssrn.com/rss/en-usWed, 17 Feb 2021 01:32:14 GMTeditor@ssrn.com (Editor)Wed, 17 Feb 2021 01:32:14 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0New: When to Quit Gambling, if You Must!We develop an approach to solve Barberis (2012)'s casino gambling model in which a gambler whose preferences are specified by the cumulative prospect theory (CPT) must decide when to stop gambling by a prescribed deadline. We assume that the gambler can assist their decision using an independent randomization, and explain why it is a reasonable assumption. The problem is inherently time-inconsistent due to the probability weighting in CPT, and we study both precommitted and naive stopping strategies. We turn the original problem into a computationally tractable mathematical program, based on which we derive an optimal precommitted rule which is randomized and Markovian. The analytical treatment enables us to make several predictions regarding a gambler's behavior, including that with randomization they may enter the casino even when allowed to play only once, that whether they will play longer once they are granted more bets depends on whether they are in a gain or at a loss, and ...
https://privwww.ssrn.com/abstract=3779900
https://privwww.ssrn.com/1991678.htmlTue, 16 Feb 2021 10:49:13 GMTNew: Variance ContractsWe study the design of an optimal insurance contract in which the insured maximizes her expected utility and the insurer limits the variance of his risk exposure while maintaining the principle of indemnity and charging the premium according to the expected value principle. We derive the optimal policy semi-analytically, which is coinsurance above a deductible when the variance bound is binding. This policy automatically satisfies the incentive-compatible condition, which is crucial to rule out ex post moral hazard. We also find that the deductible is absent if and only if the contract pricing is actuarially fair. Focusing on the actuarially fair case, we carry out comparative statics on the effects of the insured's initial wealth and the variance bound on insurance demand. Our results indicate that the expected coverage is always larger for a wealthier insured, implying that the underlying insurance is a normal good, which supports certain recent empirical findings. Moreover, as ...
https://privwww.ssrn.com/abstract=3656850
https://privwww.ssrn.com/1935771.htmlThu, 27 Aug 2020 12:21:40 GMTNew: Consistent Investment of Sophisticated Rank-Dependent Utility Agents in Continuous TimeWe study portfolio selection in a complete continuous-time market where the preference is dictated by the rank-dependent utility. As such a model is inherently time inconsistent due to the underlying probability weighting, we study the investment behavior of sophisticated consistent planners who seek (subgame perfect) intra-personal equilibrium strategies. We provide sufficient conditions under which an equilibrium strategy is a replicating portfolio of a final wealth. We derive this final wealth profile explicitly, which turns out to be in the same form as in the classical Merton model with the market price of risk process properly scaled by a deterministic function in time. We present this scaling function explicitly through the solution to a highly nonlinear and singular ordinary differential equation, whose existence of solutions is established. Finally, we give a necessary and sufficient condition for the scaling function to be smaller than 1 corresponding to an effective ...
https://privwww.ssrn.com/abstract=3617346
https://privwww.ssrn.com/1916228.htmlWed, 01 Jul 2020 15:21:37 GMTREVISION: Evolution of the Arrow-Pratt Measure of Risk-Tolerance for Predictable Forward Utility ProcessesWe study the evolution of the Arrow-Pratt measure of risk-tolerance in the framework of discrete-time predictable forward utility (or performance) processes. An agent starts with an initial utility function, which is then sequentially updated forward in time under the guidance of the martingale optimality principle. We first characterize completely the class of forward utility functions that have a time-constant measure of risk-tolerance and thus a preservation of preferences. We then show that, in general, preferences vary over time and whether the agent becomes more or less tolerant to risk is related to the curvature of the measure of risk-tolerance. An example where the initial utility function belongs to the SAHARA class, which is found to be analytically tractable and stable in the sense that all the subsequent utility functions belong to the same class as the initial one, illustrates the obtained results.
https://privwww.ssrn.com/abstract=3276638
https://privwww.ssrn.com/1906622.htmlTue, 09 Jun 2020 08:39:54 GMTREVISION: Beta and Coskewness Pricing: Perspective from Probability WeightingThe security market line is often flat or downward-sloping. We hypothesize that probability weighting plays a role and that one ought to differentiate between periods in which agents overweight extreme events and those in which they underweight them. Overweighting inflates the probability of extremely bad events and demands greater compensation for beta risk. Underweighting has the opposite effect. Overall, these two effects offset each other, resulting in a flat or slightly negative return--beta relationship. Similarly, overweighting the tails enhances the negative relationship between return and coskewness, whereas underweighting reduces it. We support our theory through an extensive empirical study.
https://privwww.ssrn.com/abstract=3579960
https://privwww.ssrn.com/1903960.htmlWed, 03 Jun 2020 08:12:33 GMTREVISION: Beta and Coskewness Pricing: Perspective from Probability WeightingThe security market line is often flat or downward-sloping. We hypothesize that probability weighting plays a role and that one ought to differentiate between periods in which agents overweight extreme events and those in which they underweight them. Overweighting inflates the probability of extremely bad events and demands greater compensation for beta risk. Underweighting has the opposite effect. Overall, these two effects offset each other, resulting in a flat or slightly negative return--beta relationship. Similarly, overweighting the tails enhances the negative relationship between return and coskewness, whereas underweighting reduces it. We support our theory through an extensive empirical study.
https://privwww.ssrn.com/abstract=3579960
https://privwww.ssrn.com/1896422.htmlTue, 12 May 2020 15:41:18 GMT