A note on the existence of CAPM equilibria with homogeneous Cumulative Prospect Theory preferences
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.
|Date of creation:||Jan 2012|
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- 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, 2007.
"Stocks as Lotteries: The Implications of Probability Weighting for Security Prices,"
NBER Working Papers
12936, National Bureau of Economic Research, Inc.
- 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.
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