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Cumulative Prospect Theory for piecewise continuous distributions

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  • Gürtler, Marc
  • Stolpe, Julia

Abstract

We extend the continuous Cumulative Prospect Theory by considering piecewise continuous distributions with a finite number of jump discontinuities. Such distributions are always relevant when outcomes depend on continuously distributed random variables and the dependency is defined by a piecewise continuous function. For example, such outcomes occur within the framework of financial engineering. We show how to apply the model to a broad class of piecewise continuous outcome functions that includes outcomes of guarantee certificates.

Suggested Citation

  • Gürtler, Marc & Stolpe, Julia, 2017. "Cumulative Prospect Theory for piecewise continuous distributions," Finance Research Letters, Elsevier, vol. 22(C), pages 5-10.
    • Handle: RePEc:eee:finlet:v:22:y:2017:i:c:p:5-10
    DOI: 10.1016/j.frl.2017.05.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Continuous Cumulative Prospect Theory; Piecewise continuous distributions; Financial engineering; Guarantee certificates;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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