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Asset Pricing and Loss Aversion

Author

Listed:
  • Willi Semmler
  • Lars Grüne

    (Economics New School University)

Abstract

Using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk-free interest rate, equity premium and the Sharpe ratio to time series data. Behavioral finance has recently proposed more realistic preferences such as preferences with loss aversion to model asset pricing. Research has now started to explore the implications of behaviorally founded preferences for asset price characteristics. Yet the solution to those models is intricate and depends on the solution techniques employed. In this paper a stochastic version of a dynamic programming method with adaptive grid scheme is applied to compute the above mentioned asset price characteristics of a model with loss aversion in preferences. Since, as shown in Grüne and Semmler (2004), our method produces only negligible errors it is suitable to be used as solution technique for such models with more intricate decision structure.

Suggested Citation

  • Willi Semmler & Lars Grüne, 2005. "Asset Pricing and Loss Aversion," Computing in Economics and Finance 2005 199, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:199
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    Cited by:

    1. Lars Grüne & Willi Semmler, 2007. "Asset pricing with dynamic programming," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 233-265, May.
    2. Enrico Giorgi & Thorsten Hens & János Mayer, 2007. "Computational aspects of prospect theory with asset pricing applications," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 267-281, May.

    More about this item

    Keywords

    asset pricing; preferences with loss aversion; behavioral finance; equity premium; dynamic programming;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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