Prospect Theory and Asset Prices

Nicholas Barberis, Ming Huang and Tano Santos
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Nicholas Barberis: University of Chicago
Tano Santos: University of Chicago

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: We study asset prices in an economy where investors derive direct utility not only from consumption but also from fluctuations in the value of their financial wealth. They are loss averse over these fluctuations and the degree of loss aversion depends on their prior investment performance. We find that our framework can help explain the high mean, excess volatility and predictability of stock returns, as well as their low correlation with consumption growth. The design of our model is influenced by prospect theory and by experimental evidence on how prior outcomes affect risky choice.

Date: 2000-09
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Prospect Theory and Asset Prices (1999)
Working Paper: Prospect Theory and Asset Prices
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Persistent link: https://EconPapers.repec.org/RePEc:fam:rpseri:rp16

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