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A note on the existence of CAPM equilibria with homogeneous Cumulative Prospect Theory preferences

  • Matteo Del Vigna

    ()

    (Dipartimento di Statistica e Matematica Applicata all'Economia, Universita' di Pisa & Universite' Paris-Dauphine)

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    This note identifies and fixes a minor gap in Proposition 1 in Barberis and Huang (2008). Assuming homogeneous Cumulative Prospect Theory decision makers, we show that CAPM is a necessary (though not sufficient) condition that must hold in equilibrium. We support our result with numerical examples where security prices become negative.

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    File URL: http://www.disei.unifi.it/upload/sub/pubblicazioni/repec/flo/workingpapers/storicodimad/2012/dimadwp2012-01.pdf
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    Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Mathematical Economics with number 2012-01.

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    Length: 5 pages
    Date of creation: Jan 2012
    Date of revision:
    Handle: RePEc:flo:wpaper:2012-01
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    1. 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.
    2. 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.
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