Financial Market Equilibria With Cumulative Prospect Therory
The 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.
|Date of creation:||May 2007|
|Date of revision:||Aug 2007|
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