CAPM Equilibria with Prospect Theory Preferences
Type
working paper
Date Issued
2011
Author(s)
Levy, Haim
;
Hens, Thorsten
Abstract
Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium, the Security Market Line Theorem holds. However, under the functional form for the utility index suggested by Tversky and Kahneman (1992), the conditions for existence of financial market equilibria exclude economically meaningful equilibria. We suggest an alternative functional form that is consistent with both, the experimental results of Tversky and Kahneman (1992), and also with the existence of economically meaningful equilibria.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
No
Publisher
http://ssrn.com/abstract=420184
Subject(s)
Eprints ID
221677