In this paper, we develop a consumption-based asset pricing model motivated by prospect theory, where habit formation determines the endogenous reference point. This exploits the similarity between habit formation and prospect theory. Both emphasize that the investor does not care about the...

In contrast to the constant exercise boundary assumed by Broadie and Detemple (1996) [Broadie, M., Detemple, J., 1996. American option valuation: New bounds, approximations, and comparison of existing methods. Review of Financial Studies 9, 1211-1250], we use an exponential function to...