This paper reveals that the class of affine term structure models introduced by Duffie and Kan (1996) is much larger than it has been usually considered in the literature. We study "fundamental" risk factors, which represent multivariate risk aversion of the consumer volatility matrix of the...

We observe that the standard variant of Prospect Theory cannot describe very risk-averse choices in simple lotteries. This makes it diffcult to accommodate it with experimental data. Using an exponential value function can solve this problem and allows to cover the whole spectrum of risk-averse...

This study investigates loss aversion when the reference point is state-dependent.Using a state-dependent structure, prospects are more attractive if they depend positively on the reference point and are less attractive in case of negative dependence. In addition, the structure is neutral in the...

Due to their underlying assumptions, the standard concepts of risk aversion and preference for the present are generally defined separately and represented by scalar measures, and this implies many shortcomings. More specifically, if measured by a scalar, the risk aversion remains unchanged,...

Markowitz and Sharpe won the Nobel Prize in Economics more than a decade ago for the development of Mean-Variance analysis and the Capital Asset Pricing Model (CAPM). In the year 2002, Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. Can these two apparently...

We propose a new continuous time framework to study asset prices under learning and ambiguity aversion. In a partial information Lucas economy with time additive power utility, a discount for ambiguity arises if and only if the elasticity of intertemporal substitution (EIS) is above one. Then,...

The disposition effect is the observation that investors hold winning stocks too long and sell losing stocks too early. A standard explanation of the disposition effect refers to prospect theory and in particular to the asymmetric risk aversion according to which investors are risk averse when...

We consider a dynamic general equilibrium model with incomplete markets in which we derive conditions for separating the savings decision from the asset allocation decision. It is shown that with logarithmic utility functions this separation holds for any heterogeneity of discount factors while...

We argue that the equity premium puzzle stems from a mismatch of applying mental accounting to experiments on risk aversion but not to the standard consumption based asset pricing model. If, as we suggest, one applies mental accounting consistently in both areas the degrees of risk aversions...

Prospect theory has found an increasing attention in many fields of economics. However, it has scarcely been addressed in a macroeconomic growth model. In an earlier paper we introduced prospect theory into a stochastic growth model. This paper focuses on linking the Euler equation induced by...