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Asset Pricing and Loss Aversion

Willi Semmler and Lars Grüne (semmlerw@newschool.edu)
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Lars Grüne: Economics New School University

No 199, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: Using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk-free interest rate, equity premium and the Sharpe ratio to time series data. Behavioral finance has recently proposed more realistic preferences such as preferences with loss aversion to model asset pricing. Research has now started to explore the implications of behaviorally founded preferences for asset price characteristics. Yet the solution to those models is intricate and depends on the solution techniques employed. In this paper a stochastic version of a dynamic programming method with adaptive grid scheme is applied to compute the above mentioned asset price characteristics of a model with loss aversion in preferences. Since, as shown in Grüne and Semmler (2004), our method produces only negligible errors it is suitable to be used as solution technique for such models with more intricate decision structure.

Keywords: asset pricing; preferences with loss aversion; behavioral finance; equity premium; dynamic programming (search for similar items in EconPapers)
JEL-codes: G1 G12 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-upt
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Citations: View citations in EconPapers (2)

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