Financial Market Equilibria With Cumulative Prospect Therory
AbstractThe 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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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-21.
Length: 29 pages
Date of creation: May 2007
Date of revision: Aug 2007
Cumulative prospect theory; general equilibrium model; non-convex preferences; continuum of agents;
Other versions of this item:
- De Giorgi, Enrico & Hens, Thorsten & Rieger, Marc Oliver, 2010. "Financial market equilibria with cumulative prospect theory," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 633-651, September.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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