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Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model

Abstract : We analyze the link between pessimism and risk-aversion. We consider a model of partially revealing, competitive rational expectations equilibrium with diverse information, in which the distribution of risk-aversion across individuals is unknown. We show that when a high individual level of risk-aversion is taken as a signal for a high average level of risk-aversion, more risk-averse agents are more optimistic. This correlation between individual risk-aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk. Risk-sharing schemes and welfare implications are analyzed. We show that agents' welfare may increase upon the receipt of more precise information.
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Submitted on : Wednesday, June 2, 2010 - 10:28:43 AM
Last modification on : Wednesday, November 17, 2021 - 12:27:12 PM
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Elyès Jouini, Clotilde Napp. Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model. Economics Letters, Elsevier, 2008, 101, pp.73-76. ⟨halshs-00176630v2⟩

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