The prospect theory of Kahneman and Tversky (1979) and the cumulative prospect theory of Tversky and Kahneman (1992) are descriptive models for decision making that summarize several violations of the expected utility theory. This paper gives a survey of applications of prospect theory to the...

This paper analyzes the persistence or serial correlation of expected returns as well as the univariate time-series approach that studies the implied autocorrelation function of realized stock returns, including mean reversion and its conditions. In particular, we critically examine whether...

This paper examines how the evidence of stock market predictability affects optimal portfolio choice for buy-and-hold and dynamic investors with different planning horizons. As in Barberis (2000), particular attention is paid to estimation risk, i.e., uncertainty about the true values of the...

This paper uses statistical model selection criteria and Avramovs (2002) Bayesian model averaging approach to analyze the sample evidence on stock market predictability in the presence of model uncertainty. Based on Swiss stock market data, our posterior analysis finds that neither the...

A common method of valuing the equity in leveraged transactions is the flows-to-equity method whereby the free cash flow available to equity holders is discounted at the cost of equity. This method uses a standard definition of equity free cash flow, but the cost of equity varies over time as...

We introduce and study no-good-deal valuation bounds defined in terms of expected utility. A utility-based good deal is a payoff whose expected utility is toohigh in comparison to the utility of its price. Forbidding good deals induces, viaduality, restrictions on pricing kernels and thereby...

We study the exponential utility indifference valuation of a contingent claim B in an incomplete market driven by two Brownian motions. The claim depends on a nontradable asset stochastically correlated with the traded asset available for hedging. We use martingale arguments to provide upper and...

We introduce heterogeneity in agents’ risk aversion into a general equilibrium asset pricing framework with recursive preferences. Agents trade in a stock, whose dividend is the only source of consumption, and in a short-term bond in zero net supply. In equilibrium the less risk averse agents...

This study finds that a model with internal habit memory allowsto simultaneously explain a series of business cycle and asset pricing puzzles. Compared to the literature, the equity premium puzzle can be resolved in a model with endogenous labor, without giving rise to excessive risk free rate...