Market equilibrium with heterogeneous behavioural and classical investors' preferences

Matteo Del Vigna ()
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Matteo Del Vigna: Dipartimento di Statistica e Matematica Applicata all'Economia, Universita' di Pisa & CEREMADE , Universite' Paris-Dauphine

No 2011-09, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: Starting from the theory of portfolio selection under Cumulative Prospect Theory (CPT) in a one period model, we firstly present some remarks connected with the violation of the so-called loss aversion in the case of power utility functions. The main contribution of this paper comes from the analysis of two equilibrium models. In the first one, an Expected Utility (EU) maximizer, a CPT agent and an accommodating market maker are allowed to interact. We show that there can be equilibria with null, positive or total risky investment by the CPT trader. Our results are then compared to an analogous model with two EU maximizers. On the contrary, the second financial market is populated by a sufficiently large number of EU agents and CPT agents, each of them being price maker and endowed with possibly heterogeneous preferences, these two facts being new to the literature. This time EU traders fully invest in stocks whereas CPT traders stay out of the risky market. For both models, equilibrium existence and robustness is shown using analytical and numerical methods.

Keywords: Cumulative Prospect Theory; equilibrium models; loss aversion; heterogeneous preferences; portfolio optimisation; volatility impact (search for similar items in EconPapers)
JEL-codes: C62 D53 D81 G11 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-04
New Economics Papers: this item is included in nep-cmp and nep-upt
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