This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Prospect Theory and Higher Moments

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Ågren, Martin (Department of Economics)

Additional information is available for the following registered author(s):

Abstract

The paper relates cumulative prospect theory to the moments of returns distributions, e.g. skewness and kurtosis, assuming returns are normal inverse Gaussian distributed. The normal inverse Gaussian distribution parametrizes the first- to forth-order moments, making the investigation straightforward. Cumulative prospect theory utility is found to be positively related to the skewness. However, the relation is negative when probability weighing is set aside. This shows that cumulative prospect theory investors display a preference for skewness through the probability weighting function. Furthermore, the investor’s utility is inverse hump-shape related to the kurtosis. Consequences for portfolio choice issues are studied. The findings, among others, suggest that optimal cumulative prospect theory portfolios are not meanvariance efficient under the normal inverse Gaussian distribution.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nek.uu.se/Pdf/wp2006_24.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2006:24.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 31 pages
Date of creation: 17 Oct 2006
Date of revision:
Handle: RePEc:hhs:uunewp:2006_024

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Katarina Grönvall).

Related research
Keywords: cumulative prospect theory; skewness; kurtosis; normal inverse Gaussian distribution; portfolio choice;

Other versions of this item:

Find related papers by JEL classification:
C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Econometric and Statistical Methods; Specific Distributions
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gustavsson, Magnus & Jordahl, Henrik, 2006. "Inequality and Trust: Some Inequalities are More Harmful than Others," Working Paper Series 2006:3, Uppsala University, Department of Economics. [Downloadable!]
  2. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics. [Downloadable!]
  3. Post, Erik, 2006. "Foreign exchange market interventions as monetary policy," Working Paper Series 2006:21, Uppsala University, Department of Economics. [Downloadable!]
  4. Chen, Jie, 2006. "The Dynamics of Housing Allowance Claims in Sweden: A discrete-time hazard analysis," Working Paper Series 2006:1, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  5. Per Engström & Bertil Holmlund, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Tobias Lindhe & Jan Södersten, 2006. "The Equity Trap, the Cost of Capital and the Firm’s Growth Path," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  7. Björnerstedt, Jonas & Westermark, Andreas, 2006. "Bargaining and Strategic Discrimination," Working Paper Series 2006:6, Uppsala University, Department of Economics. [Downloadable!]
  8. Anders Forslund & Nils Gottfries & Andreas Westermark, 2006. "Real and Nominal Wage Adjustment in Open Economies," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  9. Edmark, Karin & Ågren, Hanna, 2006. "Identifying Strategic Interactions in Swedish Local Income Tax Policies," Working Paper Series 2006:22, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  10. Dahlberg, Matz & Gustavsson, Magnus, 2005. "Inequality and crime: separating the effects of permanent and transitory income," Working Paper Series 2005:19, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
    Other versions:
  11. Klevmarken, N. Anders, 2006. "The Distribution of Wealth in Sweden: Trends and Driving factors," Working Paper Series 2006:4, Uppsala University, Department of Economics. [Downloadable!]
  12. Holmlund, Bertil & Liu, Qian & Nordström Skans, Oskar, 2006. "Mind the Gap? Estimating the Effects of Postponing Higher Education," Working Paper Series 2006:17, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  13. Nykvist, Jenny, 2005. "Entrepreneurship and Liquidity Constraints: Evidence from Sweden," Working Paper Series 2005:21, Uppsala University, Department of Economics. [Downloadable!]
  14. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series 2006:14, Uppsala University, Department of Economics. [Downloadable!]
  15. Ågren, Martin, 2006. "Does Oil Price Uncertainty Transmit to Stock Markets?," Working Paper Series 2006:23, Uppsala University, Department of Economics. [Downloadable!]
  16. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series 2006:9, Uppsala University, Department of Economics. [Downloadable!]
  17. Eklöf, Matias & Hallberg, Daniel, 2006. "Estimating retirement behavior with special early retirement offers," Working Paper Series 2006:13, Uppsala University, Department of Economics. [Downloadable!]
  18. Chen, Jie, 2006. "Housing Wealth and Aggregate Consumption in Sweden," Working Paper Series 2006:16, Uppsala University, Department of Economics. [Downloadable!]
  19. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics. [Downloadable!]
  20. Hästö, Peter & Holmberg, Pär, 2005. "Some Inequalities related to the analysis of electricity auctions," Working Paper Series 2005:23, Uppsala University, Department of Economics. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cary Deck & Harris Schlesinger, 2008. "Exploring Higher-Order Risk Effects," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Blomquist, Sören & Christiansen, Vidar, 2007. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," Working Paper Series 2007:7, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  3. Alexius, Annika & Holmlund, Bertil, 2007. "Monetary Policy and Swedish Unemployment Fluctuations," Working Paper Series 2007:17, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  4. Beechey, Meredith & Österholm, Pär, 2007. "The Rise and Fall of U.S. Inflation Persistence," Working Paper Series 2007:18, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  5. Ohlsson, Henry, 2007. "The legacy of the Swedish gift and inheritance tax, 1884–2004," Working Paper Series 2007:23, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  6. Kjellberg, David & Post, Erik, 2007. "A Critical Look at Measures of Macroeconomic Uncertainty," Working Paper Series 2007:14, Uppsala University, Department of Economics. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS was launched in September 1997.

This page was last updated on 2009-11-18.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.