On Aggregability of Risk Averse and Risk Seeking Preferences into One Representative Agent

62 Pages Posted: 5 Aug 2019 Last revised: 10 Dec 2021

Date Written: December 9, 2021

Abstract

In absence of demand for risk diversification, there is arrival at obviation of demand for stock markets. In presence of demand for risk diversification, risk aversion explicitly is shown to be nested in, that is, feasibly propagates into risk seeking preferences. Absent modeling of wealth, risk aversion is associated with lesser priced assets, and risk seeking with `corresponding' higher priced assets, resulting in feasibility of propagation of risk aversion into risk seeking preferences, and parameterization of the risk preference continuum by what is termed, `Preference-constrained Markowitz Stochastic Dominance (PMSD)'. Importantly, regardless of presence only of risk averse agents, or presence of risk averse and risk seeking agents in stock markets, underdiversification is character of general equilibrium. If intertemporal variability of severity of uncertainty induces risk seeking agents to engage in cycles of `diversification into', and `exit' from stocks that are preferred by risk averse agents, equilibriums in stock markets are governed not by preference-conditioned pricing of risk, but by volatility structures of stocks that are preferred by risk seeking agents. Stock markets then, ubiquitously deviate from rational expectations equilibriums.

Keywords: Rational Expectations, Probability Measure, Stochastic Dominance, Qualitative Probability Ordering, Price Equilibriums, Value-Growth Anomaly

JEL Classification: G11, C00, D53, D81

Suggested Citation

Obrimah, Oghenovo A., On Aggregability of Risk Averse and Risk Seeking Preferences into One Representative Agent (December 9, 2021). Available at SSRN: https://ssrn.com/abstract=3429420 or http://dx.doi.org/10.2139/ssrn.3429420

Oghenovo A. Obrimah (Contact Author)

FISK University ( email )

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Nashville, TN TN 37208-3051
United States
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