Two essays on financial economics : I. Weighted utility, risk aversion and portfolio choice : II. Competitive bidding and interest rate formation in an informal financial market

Mei Hui Jennifer Mao
This thesis consists of two essays. Each essay addresses a research problem involving some aspects of uncertainty and financial economics. Essay 1 deals with the general question of whether classical results in risk aversion and portfolio choice based on expected utility hypothesis are robust with respect to recent works in nonlinear utility theories generalizing expected utility. We investigate the implications of an axiomatic generalization called weighted utility theory along with the
more » ... but unaxiomatized linear Gateaux utility. We establish the equivalence among three definitions of individual global risk aversion, i.e., in terms of conditional certainty equivalent, mean preserving spread, and conditional risky-asset demand, without any differentiability assumptions about the preference functional. The only requirement is that the preference ordering be complete, transitive, consistent with first-degree stochastic dominance, and continuous in distribution. The equivalence between the first two definitions is also extended to a comparative context. We also identify the necessary and sufficient condition for the single risky asset to be a normal good to a weighted utility maximizer with concave lottery-specific utility functions. Unlike its expected utility counterpart, which depends only on the agent's initial wealth and preferences, this condition also depends on the characteristics of the risky asset. The second essay examines the role of a sequential competitive bidding process in the endogenous determination of interest rates and the corresponding allocation of loans and savings in a widely observed class of informal financial markets called the 'rotating credit association'. Optimal bidding strategies are obtained for individual agents with concave and time-additive utility functions. After deriving some comparative statics and efficiency implications of the individual optimal bidding strategy, we impose further restrictions, including risk neutrality, to obtain a tractable form of a Nash equil [...]
doi:10.14288/1.0096730 fatcat:s5h6jtafdvgbfnqxjz4kh2od6q