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Asymmetry, Loss Aversion, and Forecasting

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  • Shaun A. Bond

    (University of Cambridge)

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    Abstract

    Conditional volatility models have been used extensively in finance to capture predictable variation in the second moment of returns. However, with recent theoretical literature emphasizing the loss-averse nature of agents, this paper considers models that capture time variation in the second lower partial moment. Utility-based evaluation is carried out on several approaches to modeling the conditional second-order lower partial moment. The findings show that when agents are loss averse, there are utility gains to be made from using models that explicitly capture this feature. These results link the theoretical discussion on loss aversion to empirical modeling.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB790406
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 4 (July)
    Pages: 1809-1830

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:4:p:1809-1830

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Haas, Markus, 2009. "Persistence in volatility, conditional kurtosis, and the Taylor property in absolute value GARCH processes," Statistics & Probability Letters, Elsevier, vol. 79(15), pages 1674-1683, August.
    2. Tony Chieh-Tse Hou, 2012. "Return persistence and investment timing decisions in Taiwanese domestic equity mutual funds," Managerial Finance, Emerald Group Publishing, vol. 38(9), pages 873-891, September.

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