Permanent URL to this publication: http://dx.doi.org/10.5167/uzh-43751
De Giorgi, Enrico; Hens, Thorsten; Rieger, Marc Oliver (2010). Financial Market Equilibria with Cumulative Prospect Theory. Journal of Mathematical Economics, 46(5):633-651.
View at publisher
The paper first shows that financial market equilibria need not to exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. This is due to the boundary behavior of the cumulative prospect theory value function, which might cause an infinite short-selling problem. But even when a nonnegativity constraint on final wealth is added, non-existence can occur due to the non-convexity of CPT preferences, which might cause discontinuities in the agents' demand functions. This latter observation also implies that concavification arguments which has been used in portfolio allocation problems with CPT preferences do not apply to our general equilibrium setting with finite many agents. Existence of equilibria is established when non-negativity constraints on final wealth are imposed and there is a continuum of agents in the market. However, if the original prospect theory is used instead of cumulative prospect theory, then other discontinuity problems can cause non-existence of market equilibria even in this case.
118 downloads since deposited on 28 Jan 2011
22 downloads since 12 months
|Item Type:||Journal Article, refereed, original work|
|Communities & Collections:||03 Faculty of Economics > Department of Banking and Finance|
|Dewey Decimal Classification:||330 Economics|
|Date:||20 September 2010|
|Deposited On:||28 Jan 2011 12:56|
|Last Modified:||20 Jul 2014 18:53|
Users (please log in): suggest update or correction for this item
Repository Staff Only: item control page