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Prospect Theory and Higher Moments

  • Ågren, Martin

    (Department of Economics)

The paper relates cumulative prospect theory to the moments of returns distributions, e.g. skewness and kurtosis, assuming returns are normal inverse Gaussian distributed. The normal inverse Gaussian distribution parametrizes the first- to forth-order moments, making the investigation straightforward. Cumulative prospect theory utility is found to be positively related to the skewness. However, the relation is negative when probability weighing is set aside. This shows that cumulative prospect theory investors display a preference for skewness through the probability weighting function. Furthermore, the investor’s utility is inverse hump-shape related to the kurtosis. Consequences for portfolio choice issues are studied. The findings, among others, suggest that optimal cumulative prospect theory portfolios are not meanvariance efficient under the normal inverse Gaussian distribution.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2006:24.

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Length: 31 pages
Date of creation: 17 Oct 2006
Date of revision:
Handle: RePEc:hhs:uunewp:2006_024
Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/Email:


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  1. Matz Dahlberg & Magnus Gustavsson, 2008. "Inequality and Crime: Separating the Effects of Permanent and Transitory Income," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(2), pages 129-153, 04.
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  3. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics.
  4. Hästö, Peter & Holmberg, Pär, 2005. "Some Inequalities related to the analysis of electricity auctions," Working Paper Series 2005:23, Uppsala University, Department of Economics.
  5. Jie Chen, 2006. "The Dynamics of Housing Allowance Claims in Sweden: A Discrete Time-Hazard Analysis," International Journal of Housing Policy, Taylor & Francis Journals, vol. 6(1), pages 1-29.
  6. Post, Erik, 2006. "Foreign exchange market interventions as monetary policy," Working Paper Series 2006:21, Uppsala University, Department of Economics.
  7. Holmlund, Bertil & Liu, Qian & Nordström Skans, Oskar, 2006. "Mind the Gap? Estimating the Effects of Postponing Higher Education," Working Paper Series 2006:17, Uppsala University, Department of Economics.
  8. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics.
  9. Ågren, Martin, 2006. "Does Oil Price Uncertainty Transmit to Stock Markets?," Working Paper Series 2006:23, Uppsala University, Department of Economics.
  10. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series 2006:9, Uppsala University, Department of Economics.
  11. Gustavsson, Magnus & Jordahl, Henrik, 2006. "Inequality and Trust: Some Inequalities are More Harmful than Others," Working Paper Series 2006:3, Uppsala University, Department of Economics.
  12. Lindhe, Tobias & Södersten, Jan, 2006. "The Equity Trap, the Cost of Capital and the Firm´s Growth Path," Working Paper Series 2006:19, Uppsala University, Department of Economics.
  13. Chen, Jie, 2006. "Housing Wealth and Aggregate Consumption in Sweden," Working Paper Series 2006:16, Uppsala University, Department of Economics.
  14. Edmark, Karin & Ågren, Hanna, 2006. "Identifying Strategic Interactions in Swedish Local Income Tax Policies," Working Paper Series 2006:22, Uppsala University, Department of Economics.
  15. Per Engström & Bertil Holmlund, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," CESifo Working Paper Series 1736, CESifo Group Munich.
  16. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series 2006:14, Uppsala University, Department of Economics.
  17. Björnerstedt, Jonas & Westermark, Andreas, 2006. "Bargaining and Strategic Discrimination," Working Paper Series 2006:6, Uppsala University, Department of Economics.
  18. Klevmarken, N. Anders, 2006. "The Distribution of Wealth in Sweden: Trends and Driving factors," Working Paper Series 2006:4, Uppsala University, Department of Economics.
  19. Eklöf, Matias & Hallberg, Daniel, 2006. "Estimating retirement behavior with special early retirement offers," Working Paper Series 2006:13, Uppsala University, Department of Economics.
  20. Nykvist, Jenny, 2005. "Entrepreneurship and Liquidity Constraints: Evidence from Sweden," Working Paper Series 2005:21, Uppsala University, Department of Economics.
  21. Angelov, Nikolay, 2006. "Modelling firm mergers as a roommate problem," Working Paper Series 2006:10, Uppsala University, Department of Economics.
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