IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-02817702.html
   My bibliography  Save this paper

Dynamically consistent Choquet random walk and real investments

Author

Listed:
  • Robert Kast

    (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier)

  • André Lapied

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

In the real investments literature, the investigated cash flow is assumed to follow some known stochastic process (e.g. Brownian motion) and the criterion to decide between investments is the discounted utility of their cash flows. However, for most new investments the investor may be ambiguous about the representation of uncertainty. In order to take such ambiguity into account, we refer to a discounted Choquet expected utility in our model. In such a setting some problems are to dealt with: dynamical consistency, here it is obtained in a recursive model by a weakened version of the axiom. Mimicking the Brownian motion as the limit of a random walk for the investment payoff process, we describe the latter as a binomial tree with capacities instead of exact probabilities on its branches and show what are its properties at the limit. We show that most results in the real investments literature are tractable in this enlarged setting but leave more room to ambiguity as both the mean and the variance of the underlying stochastic process are modified in our ambiguous model

Suggested Citation

  • Robert Kast & André Lapied, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers hal-02817702, HAL.
    • Handle: RePEc:hal:wpaper:hal-02817702
    Note: View the original document on HAL open archive server: https://hal.inrae.fr/hal-02817702v2
    as

    Download full text from publisher

    File URL: https://hal.inrae.fr/hal-02817702v2/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert Kast & André Lapied, 2010. "Valuing future cash flows with non separable discount factors and non additive subjective measures: conditional Choquet capacities on time and on uncertainty," Theory and Decision, Springer, vol. 69(1), pages 27-53, July.
    2. Gilboa Itzhak & Schmeidler David, 1993. "Updating Ambiguous Beliefs," Journal of Economic Theory, Elsevier, vol. 59(1), pages 33-49, February.
    3. Kiyohiko G. Nishimura & Hiroyuki Ozaki, 2003. "A Simple Axiomatization of Iterated Choquet Objectives," CIRJE F-Series CIRJE-F-219, CIRJE, Faculty of Economics, University of Tokyo.
    4. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
    5. A. Chateauneuf & R. Kast & A. Lapied, 1996. "Choquet Pricing For Financial Markets With Frictions1," Mathematical Finance, Wiley Blackwell, vol. 6(3), pages 323-330, July.
    6. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    7. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    8. Kast, R. & Lapied, A., 1997. "A Decision Theoretic Approach to Bid-Ask Spreads," G.R.E.Q.A.M. 97a17, Universite Aix-Marseille III.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rossella Agliardi, 2017. "Asymmetric Choquet random walks and ambiguity aversion or seeking," Theory and Decision, Springer, vol. 83(4), pages 591-602, December.
    2. Kast, Robert & Lapied, André & Roubaud, David, 2014. "Modelling under ambiguity with dynamically consistent Choquet random walks and Choquet–Brownian motions," Economic Modelling, Elsevier, vol. 38(C), pages 495-503.
    3. Agliardi, Elettra & Agliardi, Rossella & Spanjers, Willem, 2016. "Corporate financing decisions under ambiguity: Pecking order and liquidity policy implications," Journal of Business Research, Elsevier, vol. 69(12), pages 6012-6020.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. André Lapied & Robert Kast, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers 10-21, LAMETA, Universtiy of Montpellier, revised 2010.
    2. Robert Kast & André Lapied, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers halshs-00533826, HAL.
    3. Robert Kast, 2011. "Managing financial risks due to natural catastrophes," Working Papers hal-00610241, HAL.
    4. Kast, Robert & Lapied, André & Roubaud, David, 2014. "Modelling under ambiguity with dynamically consistent Choquet random walks and Choquet–Brownian motions," Economic Modelling, Elsevier, vol. 38(C), pages 495-503.
    5. Jürgen Eichberger & Simon Grant & David Kelsey, 2012. "When is ambiguity–attitude constant?," Journal of Risk and Uncertainty, Springer, vol. 45(3), pages 239-263, December.
    6. Robert Kast & André Lapied, 2010. "Valuing future cash flows with non separable discount factors and non additive subjective measures: conditional Choquet capacities on time and on uncertainty," Theory and Decision, Springer, vol. 69(1), pages 27-53, July.
    7. Dominiak, Adam & Duersch, Peter & Lefort, Jean-Philippe, 2012. "A dynamic Ellsberg urn experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 625-638.
    8. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
    9. Faro, José Heleno & Lefort, Jean-Philippe, 2019. "Dynamic objective and subjective rationality," Theoretical Economics, Econometric Society, vol. 14(1), January.
    10. Alexander Ludwig & Alexander Zimper, 2013. "A decision-theoretic model of asset-price underreaction and overreaction to dividend news," Annals of Finance, Springer, vol. 9(4), pages 625-665, November.
    11. Heyen, Daniel, 2018. "Ambiguity aversion under maximum-likelihood updating," LSE Research Online Documents on Economics 80342, London School of Economics and Political Science, LSE Library.
    12. Ludwig, Alexander & Zimper, Alexander, 2014. "Biased Bayesian learning with an application to the risk-free rate puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 79-97.
    13. Lapied, André & Toquebeuf, Pascal, 2012. "Dynamically consistent CEU preferences on f-convex events," Mathematical Social Sciences, Elsevier, vol. 63(3), pages 252-256.
    14. Marciano Siniscalchi, 2001. "Bayesian Updating for General Maxmin Expected Utility Preferences," Discussion Papers 1366, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    15. Gilboa, Itzhak & Samuelson, Larry & Schmeidler, David, 2022. "Learning (to disagree?) in large worlds," Journal of Economic Theory, Elsevier, vol. 199(C).
    16. Takao Asano & Hiroyuki Kojima, 2019. "Consequentialism and dynamic consistency in updating ambiguous beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 223-250, July.
    17. Eichberger, Jürgen & Grant, Simon & Lefort, Jean-Philippe, 2008. "Neo-additive capacities and updating," Sonderforschungsbereich 504 Publications 08-31, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    18. Frank Riedel, 2017. "Uncertain Acts in Games," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 34(4), pages 275-292, December.
    19. Takao Asano, 2004. "Portfolio Inertia and [Epsilon]-Contaminations," ISER Discussion Paper 0610, Institute of Social and Economic Research, Osaka University.
    20. Alexander Zimper, 2011. "Do Bayesians Learn Their Way Out of Ambiguity?," Decision Analysis, INFORMS, vol. 8(4), pages 269-285, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-02817702. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.