Prospect Theory and Asset Prices
AbstractWe study asset prices in an economy where investors derive direct utility not only from consumption but also from fluctuations in the value of their financial wealth. They are loss averse over these fluctuations and the degree of loss aversion depends on their prior investment performance. We find that our framework can help explain the high mean, excess volatility and predictability of stock returns, as well as their low correlation with consumption growth. The design of our model is influenced by prospect theory and by experimental evidence on how prior outcomes affect risky choice.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp16.
Date of creation: Sep 2000
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- Ait-Sahalia, Y. & Brandt, M.W., 2001.
"Variable Selection for Portfolio Choice,"
34, Manitoba - Department of Economics.
- Yacine AÏT-SAHALIA, & Michael W. BRANDT, 2001. "Variable Selection for Portfolio Choice," FAME Research Paper Series rp34, International Center for Financial Asset Management and Engineering.
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- Pietro Veronesi, . "Belief-dependent Utilities, Aversion to State-Uncertainty and Asset Prices,”," CRSP working papers 529, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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