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Cumulative Prospect Theory for piecewise continuous distributions

Marc Gürtler and Julia Stolpe

Finance Research Letters, 2017, vol. 22, issue C, 5-10

Abstract: We extend the continuous Cumulative Prospect Theory by considering piecewise continuous distributions with a finite number of jump discontinuities. Such distributions are always relevant when outcomes depend on continuously distributed random variables and the dependency is defined by a piecewise continuous function. For example, such outcomes occur within the framework of financial engineering. We show how to apply the model to a broad class of piecewise continuous outcome functions that includes outcomes of guarantee certificates.

Keywords: Continuous Cumulative Prospect Theory; Piecewise continuous distributions; Financial engineering; Guarantee certificates (search for similar items in EconPapers)
JEL-codes: D81 G13 C65 (search for similar items in EconPapers)
Date: 2017
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