Dynamic Portfolio Choice and Asset Pricing with Narrow Framing and Probability Weighting

Item Type Journal paper
Abstract This paper shows that the framework proposed by Barberis and Huang (2009) to incorporate narrow framing and loss aversion in dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and a value function which is convex on losses and concave on gains. We show that the addition of probability weighting and a convex-concave value function reinforces previous applications of narrow framing and cumulative prospect theory to explain the stock market non-participation puzzle and the equity premium puzzle. Moreover, we show that a convex-concave value function generates new wealth effects that are consistent with empirical observations on stock market participation.
Authors De Giorgi, Enrico & Legg, Shane
Projects De Giorgi, Enrico & Audrino, Francesco (2010) Applying Recent Developments in Computational Statistics to Behavioral Asset Pricing and Portfolio Selection [applied research project]
Journal or Publication Title Journal of Economic Dynamics and Control
Language English
Keywords Narrow framing, cumulative prospect theory, negative skewness, simulation methods.
Subjects economics
HSG Classification contribution to scientific community
Refereed Yes
Date July 2012
Publisher Elsevier
Place of Publication Amsterdam
Volume 36
Number 7
Page Range 951-972
Number of Pages 22
ISSN 0165-1889
ISSN-Digital 1879-1743
Publisher DOI https://doi.org/10.1016/j.jedc.2012.01.010
Depositing User Prof. Ph.D Enrico Giovanni De Giorgi
Date Deposited 03 Jun 2009 17:00
Last Modified 23 Aug 2016 11:06
URI: https://www.alexandria.unisg.ch/publications/53939

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De Giorgi, Enrico & Legg, Shane (2012) Dynamic Portfolio Choice and Asset Pricing with Narrow Framing and Probability Weighting. Journal of Economic Dynamics and Control, 36 (7). 951-972. ISSN 0165-1889

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https://www.alexandria.unisg.ch/id/eprint/53939
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