The market's implied loss aversion under power-log utility investor preferences

Jivendra K. Kale

Finance Research Letters, 2025, vol. 78, issue C

Abstract: We use the equilibrium between equity-index spot and options markets, investor preferences modeled with Power-Log utility functions, and utility indifference pricing to estimate the market's implied loss aversion, and test prospect theory's and cumulative prospect theory's decreasing marginal sensitivity to losses postulate at the aggregate market level. We find that the equilibrium downside power in the Power-Log utility function is consistently and significantly negative, implying increasing marginal sensitivity and a concave utility function for losses. That contradicts prospect theory's and cumulative prospect theory's S-shaped value function at the aggregate market level.

Keywords: Behavioral finance; Power-log utility; Loss aversion; Prospect theory; Cumulative prospect theory (search for similar items in EconPapers)
JEL-codes: D90 E70 G10 G40 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612325004179
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: https://EconPapers.repec.org/RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325004179

DOI: 10.1016/j.frl.2025.107154

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().