While CBOE's VIX index is widely acknowledged as a broad-based investor “fear gauge” for its strong inverse relationship with major equity indexes, one cannot necessarily expect it to translate to the level of future turbulence or investor risk aversion in fixed-income markets. Indeed,...

This paper shows that the framework proposed by Barberis and Huang (2009) to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and...

Reference-dependent preference models assume that agents derive utility from deviations of consumption from benchmark levels, rather than from consumption levels. These references can be either backward-looking (as explicit in the Habit literature) or forward-looking (as implicitly suggested by...

This study investigates reference-dependent choice with a stochastic, state-dependent reference point. The optimal reference-dependent solution equals the optimal consumption solution (no loss aversion) if the reference point is selected fully endogenously. Given that loss aversion is...

The paper first shows that financial market equilibria need not to exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. This is due to the boundary behavior of the cumulative prospect theory value function, which might cause an infinite...

We show that the optimal asset allocation for an investor depends crucially on the theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The...

We compare asset allocations that are derived for cumulative prospect theory (CPT) based on two different methods: maximizing CPT along the mean {variance efficient frontier and maximizing CPT without this restriction. We find that with normally distributed returns, the difference between these...

We show that liquidity risk is priced in the cross section of returns on credit default swaps (CDSs). We measure CDS market illiquidity by aggregating deviations of credit index levels from their no-arbitrage values implied by the index constituents' CDS spreads, and we construct a tradable...

This paper shows that the VIX market contains information on the variance of the S&P 500 returns, which is not already spanned by the S&P 500 market. We estimate a flexible affine model based on a joint time series of underlying indexes and option prices on both markets. We find that including...