One for the Gain, Three for the Loss

Anders E. S. Anderson
Additional contact information
Anders E. S. Anderson: Swedish Institute for Financial Research, Postal: Saltmätargatan 19 A, 4th fl., SE-113 59 Stockholm, Sweden, http://www.sifr.org

No 20, SIFR Research Report Series from Institute for Financial Research

Abstract: I derive indifference curves in mean-standard deviation space for investors with prospect theory preferences when returns are normally distributed. The normality assumption creates a mapping between model parameters and the investment opportunity set. The model is then calibrated to historical return data for various assumptions regarding the set of admissible risky assets. It is found that the parameter for loss aversion must be higher than three for investors to hold finitely leveraged portfolios. For lower rates of loss aversion, in particular those proposed in the earlier experimental literature, the allocation to risky assets is infinite. Numerical simulations produce similar results when the normality assumption is abandoned.

Keywords: Investor behavior; Portfolio choice; Prospect theory (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2004-04-15
New Economics Papers: this item is included in nep-cmp
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sifr.org/PDFs/sifr-wp20.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:sifrwp:0020

Access Statistics for this paper

More papers in SIFR Research Report Series from Institute for Financial Research Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Anki Helmer ().