From boom [`]til bust: How loss aversion affects asset prices

Arjan Berkelaar and Roy Kouwenberg ()

Journal of Banking & Finance, 2009, vol. 33, issue 6, pages 1005-1013

Abstract: This article studies the impact of heterogeneous loss averse investors on asset prices. In very good states loss averse investors become gradually less risk averse as wealth rises above their reference point, pushing up equity prices. When wealth drops below the reference point the investors become risk seeking and demand for stocks increases drastically, eventually leading to a forced sell-off and stock market bust in bad states. Heterogeneity in reference points and initial wealth of the loss averse investors does not change the salient features of the equilibrium price process, such as a relatively high equity premium, high volatility and counter-cyclical changes in the equity premium.

Keywords: Asset; pricing; Equilibrium; Behavioral; finance; Loss; aversion (search for similar items in EconPapers)
Date: 2009

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6VCY ... 90b308694a769156e6d2
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:6:p:1005-1013

Access Statistics for this article

Journal of Banking & Finance is edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Heidi Boesdal ().