Haim Levy

The Efficiency Analysis of Choices Involving Risk

Presents an efficiency analysis of choices involving risk in portfolio selection. Description of a necessary and sufficient condition of efficiency; Computations for the optimal efficiency criterion in the presence of general risk aversion; Analysis of the conditions under which the mean-variance criterion is a valid efficiency criterion. (Из Ebsco)

Prospect Theory: Much Ado About Nothing?

Prospect theory is a paradigm challenging the expected utility paradigm. One of the fundamental components of prospect theory is the S-shaped value function. The value function is mainly justified by experimental investigation of the certainty equivalents of prospects confined either to the negative or to the positive domain, but not of mixed prospects, which characterize most actual investments. We conduct an experimental study withmixed prospects, using, for the first time, recently developed investment criteria called Prospect Stochastic Dominance (PSD) and Markowitz Stochastic Dominance (MSD). We reject the S-shaped value function, showing thatat least 62%--76% of the subjects cannot be characterized by such preferences. We find support for the Markowitz utility function, which is a reversed S-shaped function--exactly the opposite of the prospect theory value function. It is possible that the previous results supporting the S-shaped value function are distorted because the prospects had only positive or only negative outcomes, presenting hypothetical situations which individuals do not usually face, and which are certainly not common in financial markets.

A microscopic model of the stock market : Cycles, booms, and crashes

Abstract We present a model of the stock market based on the behavior of individual investors. Simulations exhibit rich phenomena which include cycles, booms, and crashes. Low dividend yield and more homogeneous market participants are shown to induce crashes.

Is There an Intertemporal Relation between Downside Risk and Expected Returns

This paper examines the intertemporal relation between downside risk and expected stock returns. Value at Risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a risk-return tradeoff. We find a positive and significant relation between downside risk and the portfolio returns on NYSE/AMEX/Nasdaq stocks. VaR remains a superior measure of risk when compared with the traditional risk measures. These results are robust across different stock market indices, different measures of downside risk, loss probability levels, and after controlling for macroeconomic variables and volatility over different holding periods as originally proposed by Harrison and Zhang (1999).

Absolute and relative risk aversion: An experimental study

Kenneth Arrow posed the hypotheses that investors reveal decreasing absolute risk aversion (DARA) and increasing relative risk aversion (IRRA). It is very difficult to empirically test these two hypotheses since one needs to analyze an investors investment decisions at various points in his/her economic life cycle as the investors wealth varies. An experimental study is conducted to test these two hypotheses when the subjects wealth varies depending on his/her investment performance. The experiment involves an actual money gain or loss which is indexed to the individuals investment performance. It is found that DARA is indeed strongly supported, but IRRA is rejected.

Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions

Laboratory experiments with and without real money repeatedly reveal that even if all subjects observe the same pair of cumulative distributions F and G, they act as if they were other cumulative probability functions F* and G* different for different investors. Namely, the subjects assign (subjective) weights to the various probabilities. In their breakthrough article Kahneman and Tversky [1979] suggest that in making decisions under uncertainty, the subjects apply a monotonic transformation π(p) where p are the probabilities, and investors make decisions by comparing π(p) corresponding to the two distributions under consideration rather than by comparing the true probabilities, p, themselves.

Relative Effectiveness of Efficiency Criteria for Portfolio Selection

Individual decisions about investment may be regarded as choices among alternative probability distributions of net returns. It is assumed that these distributions are completely known and independent of initial wealth positions, and that individuals determine the preferred portfolio of investment in accordance with a given, consistent set of preferences.

Markowitz Versus the Talmudic Portfolio Diversification Strategies

Although expected utility theory and the classical mean variance diversification theory of Markowitz assert that optimal diversification depends on the joint distribution of returns, investors tend to ignore these well-accepted theoretical approaches in favor of the naïve investment strategy promulgated in the Babylonian Talmud called the 1/3 rule (or the 1/n rule for n assets),which assigns an equal weight to each security in the portfolio. In testing the efficiency of the 1/n rule, the authors find that it outperforms the mean variance rule for individual small portfolios out of sample, but for large portfolios (i.e., institutional investors) the Markowitz strategy is superior. The advantage of the 1/n rule in the out-of-sample analysis is the absence of exposures to estimation errors.

Experimental tests of the mean-variance model for portfolio selection

Abstract Statistically knowledgeable male and female undergraduate students participated in 40 portfolio selection problems with monetary payoff contingent on performance. The portfolio selection task included two independent risky assets with normally distributed returns. It provided access to information about previous returns, allowed borrowing and lending at a fixed interest rate, and forced on each decision period a choice between the two risky assets. The findings show a high percentage of inefficient mean-variance portfolios which does not decrease with practice, a high rate of requests for useless information, a large frequency of switches between the two risky assets, and sequential dependencies. Theoretical and practical implications of the findings are briefly discussed.

The saliva of the medicinal leech Hirudo medicinalis—1. Biochemical characterization of the high molecular weight fraction

1. A method is described for obtaining dilute Hirudo medicinalis saliva by feeding leeches through a membrane on arginine/saline and squeezing them immediately after from the posterior end forwards. The process can be repeated at intervals. Yields are considerably higher than from salivary gland extracts. 2. Hirudo saliva contains hirudin, eglin, hyaluronidase, collagenase and apyrase. Leech collagenase and apyrase are here reported for the first time. 3. On gel filtration of lyophilized saliva, activity peaks were well defined. Approximate molecular weights were determined. Apyrase appears in two forms with optimum activity around pH 7.5. Collagenase was identified as belonging to the mammalian type.