Journal ArticleDOI
Loss aversion and the term structure of interest rates
Mao-Wei Hung,Jr-Yan Wang +1 more
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In this article, the authors studied how the loss-averse behaviour of prospect theory affects the term structure of real interest rates and incorporated the loss averse behaviour into the consumption-based asset pricing model.Abstract:
This article studies how the loss averse behaviour affects the term structure of real interest rates. Since the pro-cyclical conditional expected marginal rate of substitution, implied from the US consumption data, is consistent with the proposition of loss aversion, we incorporate the loss averse behaviour of prospect theory into the consumption-based asset pricing model. Motivated by the similarity between habit formation and the prospect theory utility, habit formation is exploited to determine endogenously the reference point of this behavioural finance utility. The highly curved characteristic of the term structure of real interest rates can thus be captured by the additional consideration of loss aversion. This model also fits the downward sloping volatility of the real yield curve in the data of US Treasury Inflation-Protection Securities (TIPS). Moreover, depending on the effective risk attitude of the representative agent with the loss averse behaviour of prospect theory, our model is capable of ...read more
Citations
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Journal ArticleDOI
Loss Aversion, Habit Formation and the Term Structures of Equity and Interest Rates
TL;DR: In this paper, a consumption-based asset pricing model was proposed to jointly explain the high equity premium, the countercyclical behaviour of stock returns, the upward sloping term structure of interest rates and the downward sloping terms of equity.
Journal ArticleDOI
Loss aversion, habit formation and the term structures of equity and interest rates
TL;DR: In this paper, a consumption-based asset pricing model was proposed to jointly explain the high equity premium, the countercyclical behaviour of stock returns, the upward-sloping term structure of interest rates and the downward sloping term structures of equity.
Journal ArticleDOI
Bounded Cumulative Prospect Theory: Some Implications for Gambling Outcomes
TL;DR: In this paper, the authors assume that the value function is bounded from above and below and that the degree of loss aversion experienced by the agent is smaller for small-stake gambles than usually assumed in CPT.
Posted Content
Anchoring or Loss Aversion? Empirical Evidence from Art Auctions
Kathryn Graddy,Lara Loewenstein,Jianping Mei,Michael J. Moses,Rachel A.J. Pownall,Rachel A.J. Pownall +5 more
TL;DR: This article found evidence for the behavioral biases of anchoring and loss aversion for items that are resold quickly and found that the effect of loss aversion increases with the time that a painting is held.
Journal ArticleDOI
Skewness as an Explanation of Gambling in Cumulative Prospect Theory
David Peel,David Law +1 more
TL;DR: In this paper, the authors investigate the relationship between moments of return in two models where agents choices over uncertain outcomes are determined as in cumulative prospect theory, and illustrate via examples that propositions that agents have a preference for skewness may be invalid.
References
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Book ChapterDOI
Prospect theory: an analysis of decision under risk
Daniel Kahneman,Amos Tversky +1 more
TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Journal ArticleDOI
Prospect theory: analysis of decision under risk
Daniel Kahneman,Amos Tversky +1 more
Journal ArticleDOI
Advances in prospect theory: cumulative representation of uncertainty
Amos Tversky,Daniel Kahneman +1 more
TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
Journal ArticleDOI
THE EQUITY PREMIUM A Puzzle
Rajnish Mehra,Edward C. Prescott +1 more
TL;DR: This paper showed that an equilibrium model which is not an Arrow-Debreu economy will be the one that simultaneously rationalizes both historically observed large average equity return and the small average risk-free return.
Posted Content
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: In this paper, a consumption-based model is proposed to explain a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-term horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.