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Limited Participation and Asset Allocation under Ambiguity of Correlation

Release time:March 28, 2018

Topic: Limited Participation and Asset Allocation under Ambiguity of Correlation

Speaker: Professor Zhang Shunming (RUC)

Date: March 30, 14:00-16:00

Venue: A618, New Main Building

Abstract:

This paper investigates the implication of correlation ambiguity for investors' decision making and limited participation under market equilibrium. In our multi-asset model with inside, sophisticated, naive, and noise investors, individual decision making incorporates both risk and ambiguity. Sophisticated and naive investors trade in the same direction as inside investors, while naive investors trade in the same direction as sophisticated investors. Furthermore, noise investors trade in the same direction as sophisticated and naive investors. We demonstrate that limited participation arises from the rational decision by sophisticated and naive and noise investors to avoid correlation ambiguity. Comparative static analysis of the equilibrium result suggests that changes in the ambiguity level for sophisticated and naive investors and the fraction of four types of investors can alter equilibrium types and affect equilibrium prices. We also observe flight to quality phenomenon. Under equilibrium, the investors with less information could trade more intensively than the investors with more information in one of the risky assets.

Bio of the Speaker:

Shunming ZHANG is a professor of the School of Finance of Renmin University of China, a Winner winner of National Outstanding Young Science Fund and a Distinguished Professor of Yangtze River Scholar Award Program of Ministry of Education. He has hosted the key project of National Social Science Fund, “The Impact of International Trade on China's Economic Growth”, National Science Fund for Distinguished Young Scholars project of “Financial Decision Theory and Behavioral Finance Research”, National Natural Science Fund project of “Research on The Pricing Rules of the Market under the Condition of Private Information”, “The Research on the View of Religious Interests, the Support to the Xinjiang’s Progress and Economic Stability in Xinjiang from the perspective Perspective of CGE” and “Limited Participation and asymmetric Asymmetric information Information under Ambiguity of Correlation”. He is mainly engaged in the teaching and research on Economics and Finance, and has published more than 40 papers in the fields of mathematical economics, financial economics, economic theory and economic policy, including Journal of Mathematical Economics, Mathematical Finance, Journal of Mathematical Analysis and Applications, Journal of Development Economics, Economic Theory, European Journal of Operational Research, World Economy, Economic Modelling, Journal of Banking and Finance, and  Journal of Financial Markets (2017) .
 

School of Management and Economics