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

Elyès Jouini (jouini@ceremade.dauphine.fr) and Clotilde Napp

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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.

Keywords: Optimism; risk-aversion; rational expectations; risk-premium; heterogenous beliefs (search for similar items in EconPapers)
Date: 2008-10
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00176630v2
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Citations: View citations in EconPapers (4)

Published in Economics Letters, 2008, 101, pp.73-76

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00176630

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