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Financial Market Equilibria With Cumulative Prospect Therory

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Author Info
Enrico De Giorgi (University of Lugano and Swiss Finance Institute)
Thorsten Hens (University of Zurich)
Marc Oliver Rieger (University of Zurich)

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Abstract

The paper shows that financial market equilibria need not exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. The reason is an infinite short-selling problem. But even when a short-sell constraint is added, non-existence can occur due to discontinuities in agents demand functions. Existence of equilibria is established when short-sales constraints are imposed and there is also a continuum of agents in the market.

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File URL: http://ssrn.com/abstract=985539
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Publisher Info
Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-21.

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Length: 29 pages
Date of creation: May 2007
Date of revision: Aug 2007
Handle: RePEc:chf:rpseri:rp0721

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Web page: http://www.SwissFinanceInstitute.ch
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Related research
Keywords: Cumulative prospect theory; general equilibrium model; non-convex preferences; continuum of agents;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

This paper has been announced in the following NEP Reports:

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This page was last updated on 2009-11-30.

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