On financial bubbles, investment decisions and investor’s utility

Spyridon D. Symeonides and Gerassimos Sapountzoglou
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Spyridon D. Symeonides: University of Ioannina
Gerassimos Sapountzoglou: Athens University of Economics and Business

No 201406, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: This paper is concerned with the consequences of the financial bubbles on investment deci- sions and on the expected utility of the typical investor. Under the bubble effect, the typical in- vestor undertakes more-than-optimal risks, for which there is no proper compensation, given the actual capital-market line. This leads to significant expected utility losses. Since the risk-free return is a measure of the time value of money, the issuers of risk-free assets can tame the bubble beast by being disciplined enough to maintain the return on risk-free assets at its pre-bubble equilibrium le- vel. The role of financial analysts and capital-market authorities is important nontheless.

Keywords: Financial bubbles; capital-market line; risk premia; expected utility; financial analysts; capital-market authorities; risk-free asset issuers. (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G18 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2014-06
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Persistent link: https://EconPapers.repec.org/RePEc:aeb:wpaper:201406:y:2014

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