IDEAS home Printed from https://ideas.repec.org/a/bla/mathfi/v34y2024i3p925-976.html
   My bibliography  Save this article

Reference dependence and endogenous anchors

Author

Listed:
  • Paolo Guasoni
  • Andrea Meireles‐Rodrigues

Abstract

In a complete market, we find optimal portfolios for an investor whose satisfaction stems from both a payoff's intrinsic utility and its comparison with an endogenous reference as modeled by Kőszegi and Rabin. In the regular regime, arising when reference dependence is low, the marginal utility of the optimal payoff is proportional to a twist of the pricing kernel. High reference dependence leads to the anchors regime, whereby investors reduce disappointment by concentrating significant probability in one or few fixed outcomes, or “anchors.” Multiple equilibria arise because anchors may not be unique. If stocks follow geometric Brownian motion, the model implies that investors with longer horizons choose larger stocks holdings.

Suggested Citation

  • Paolo Guasoni & Andrea Meireles‐Rodrigues, 2024. "Reference dependence and endogenous anchors," Mathematical Finance, Wiley Blackwell, vol. 34(3), pages 925-976, July.
    • Handle: RePEc:bla:mathfi:v:34:y:2024:i:3:p:925-976
    DOI: 10.1111/mafi.12421
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/mafi.12421
    Download Restriction: no
    File URL: https://libkey.io/10.1111/mafi.12421?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:mathfi:v:34:y:2024:i:3:p:925-976. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.