From Boom 'til Bust: How Loss Aversion Affects Asset Prices
32 Pages Posted: 30 Jun 2000 Last revised: 1 Apr 2009
Date Written: Oct 29, 2008
Abstract
This article studies the impact of heterogeneous loss averse investors on asset prices. In very good states loss averse investors become gradually less risk averse as wealth rises above their reference point, pushing up equity prices. When wealth drops below the reference point the investors become risk seeking and demand for stocks increases drastically, eventually leading to a forced sell-off and stock market bust in bad states. Heterogeneity in reference points and initial wealth of the loss averse investors does not change the salient features of the equilibrium price process, such as a relatively high equity premium, high volatility and counter-cyclical changes in the equity premium.
Keywords: Asset pricing, Equilibrium, Behavioral finance, Loss aversion
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Andrew Ang, Geert Bekaert, ...
-
By Andrew Ang, Geert Bekaert, ...
-
Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing
By Nicholas Barberis, Ming Huang, ...
-
Optimal Portfolio Choice Under Loss Aversion
By Arjan B. Berkelaar, Roy Kouwenberg, ...
-
The Implications of First-Order Risk Aversion for Asset Market Risk Premiums
By Geert Bekaert, Robert J. Hodrick, ...
-
Portfolio Choice and Trading Volume with Loss Averse Investors
-
What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
By Nicholas Barberis and Wei Xiong
-
What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
By Nicholas Barberis and Wei Xiong
-
The Independence Axiom and Asset Returns
By Larry G. Epstein and Stanley E. Zin
-
Individual Preferences, Monetary Gambles and the Equity Premium
By Nicholas Barberis, Ming Huang, ...