Dynamic Portfolio Choice and Asset Pricing with Narrow Framing and Probability Weighting
Journal
Journal of Economic Dynamics and Control
ISSN
0165-1889
ISSN-Digital
1879-1743
Type
journal article
Date Issued
2012-07
Author(s)
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.
Language
English
Keywords
Narrow framing
cumulative prospect theory
negative skewness
simulation methods.
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
36
Number
7
Start page
951
End page
972
Pages
22
Subject(s)
Eprints ID
53939