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Prospect Theory and the CAPM: A contradiction or coexistence?


Levy, Haim; De Giorgi, Enrico; Hens, Thorsten (2003). Prospect Theory and the CAPM: A contradiction or coexistence? Working paper series / Institute for Empirical Research in Economics No. 157, University of Zurich.

Abstract

Under the assumption of normally distributed returns, we analyzenwhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)nis consistent with the Capital Asset Pricing Model. We find that in everynfinancial market equilibrium the Security Market Line Theorem holds.nHowever, under the specific functional form suggested by Tversky andnKahneman (1992) financial market equilibria do not exist. We suggest annalternative functional form that is consistent with both, the experimentalnresults of Tversky and Kahneman and also with the existence of equilibria.

Abstract

Under the assumption of normally distributed returns, we analyzenwhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)nis consistent with the Capital Asset Pricing Model. We find that in everynfinancial market equilibrium the Security Market Line Theorem holds.nHowever, under the specific functional form suggested by Tversky andnKahneman (1992) financial market equilibria do not exist. We suggest annalternative functional form that is consistent with both, the experimentalnresults of Tversky and Kahneman and also with the existence of equilibria.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:June 2003
Deposited On:29 Nov 2011 22:32
Last Modified:07 Dec 2017 10:08
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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