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Investment decisions with loss aversion over relative consumption

  • Gebhardt, Georg
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    We study an exchange economy in which investors are loss averse over relative consumption, that is, they suffer a utility loss if they consume less than members of their reference group. As a consequence there is an incentive to hold the same portfolio of risky assets as the reference group. Thus, risk premia can be supported in equilibrium that diverge from the risk premia obtained without loss aversion over relative consumption. This effect may be used to explain time-varying risk premia that are empirically observed for many assets.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167268111000758
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    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 80 (2011)
    Issue (Month): 1 ()
    Pages: 68-73

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    Handle: RePEc:eee:jeborg:v:80:y:2011:i:1:p:68-73
    Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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    1. Nicholas Barberis & Ming Huang & Tano Santos, . "Prospect Theory and Asset Prices," CRSP working papers 494, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    2. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
    3. Ernst Fehr & Klaus M. Schmidt, . "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers 004, Institute for Empirical Research in Economics - University of Zurich.
    4. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    6. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
    7. Gomez, Juan-Pedro, 2007. "The impact of keeping up with the Joneses behavior on asset prices and portfolio choice," Finance Research Letters, Elsevier, vol. 4(2), pages 95-103, June.
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