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|
|Contact details of provider:|| Web page: http://www.SwissFinanceInstitute.ch|
More information through EDIRC
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.:
- Jonathan Ingersoll, 2008. "Non-Monotonicity of the Tversky-Kahneman Probability-Weighting Function: A Cautionary Note," European Financial Management, European Financial Management Association, vol. 14(3), pages 385-390.
- Hanqing Jin & Xun Yu Zhou, 2008. "Behavioral Portfolio Selection In Continuous Time," Mathematical Finance, Wiley Blackwell, vol. 18(3), pages 385-426.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Ravi Jagannathan & Zhenyu Wang, 1996.
"The conditional CAPM and the cross-section of expected returns,"
208, Federal Reserve Bank of Minneapolis.
- Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Werner, Jan, 1987. "Arbitrage and the Existence of Competitive Equilibrium," Econometrica, Econometric Society, vol. 55(6), pages 1403-18, November.
- Allouch, Nizar & Le Van, Cuong & Page, Frank Jr., 2006.
"Arbitrage and equilibrium in unbounded exchange economies with satiation,"
Journal of Mathematical Economics,
Elsevier, vol. 42(6), pages 661-674, September.
- Nizar Allouch & Cuong Le Van & Frank H. Page, 2006. "Arbitrage and equilibrium in unbounded exchange economies with satiation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00096040, HAL.
- Schmeidler, David, 1969.
"Competitive Equilibria in Markets with a Continuum of Traders and Incomplete Preferences,"
Econometric Society, vol. 37(4), pages 578-85, October.
- SCHMEIDLER, David, . "Competitive equilibria in markets with a continuum of traders and incomplete preferences," CORE Discussion Papers RP 62, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Nicholas Barberis & Ming Huang, 2008.
"Stocks as Lotteries: The Implications of Probability Weighting for Security Prices,"
American Economic Review,
American Economic Association, vol. 98(5), pages 2066-2100, December.
- Nicholas Barberis & Ming Huang, 2007. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," NBER Working Papers 12936, National Bureau of Economic Research, Inc.
- Yamazaki, Akira, 1978. "An Equilibrium Existence Theorem without Convexity Assumptions," Econometrica, Econometric Society, vol. 46(3), pages 541-55, May.
- Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0721. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja)
If references are entirely missing, you can add them using this form.