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A note on the existence of CAPM equilibria with homogeneous cumulative prospect theory preferences

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  • Matteo Del Vigna

Abstract

This note identifies and fixes a minor gap in Proposition 1 in Barberis and Huang (Am Econ Rev 98(5):2066–2100, 2008 ). Assuming homogeneous cumulative prospect theory decision makers, we show that CAPM is a necessary (though not sufficient) condition that must hold in equilibrium. We support our results with numerical examples where security prices become negative. Copyright Springer-Verlag Italia 2014

Suggested Citation

  • Matteo Del Vigna, 2014. "A note on the existence of CAPM equilibria with homogeneous cumulative prospect theory preferences," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 341-348, October.
    • Handle: RePEc:spr:decfin:v:37:y:2014:i:2:p:341-348
    DOI: 10.1007/s10203-012-0140-8
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    References listed on IDEAS

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    1. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    2. Allingham, Michael, 1991. "Existence Theorems in the Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 59(4), pages 1169-1174, July.
    3. Levy, Moshe, 2007. "Conditions for a CAPM equilibrium with positive prices," Journal of Economic Theory, Elsevier, vol. 137(1), pages 404-415, November.
    4. Nielsen, Lars Tyge, 1988. "Uniqueness of Equilibrium in the Classical Capital Asset Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(3), pages 329-336, September.
    5. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
    6. Nielsen, Lars Tyge, 1992. "Positive Prices in CAPM," Journal of Finance, American Finance Association, vol. 47(2), pages 791-808, June.
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    More about this item

    Keywords

    Asset pricing; Capital asset pricing model; Cumulative prospect theory; C62; D53; G11; G12;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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