We solve a liquidation problem for an agent with preferences consistent with the prospect theory of Kahneman and Tversky (1978). We find that the agent is willing to hold a risky project with a relatively inferior Sharpe ratio if the project is currently making losses, and intends to liquidate...

We solve a liquidation problem for an agent with preferences consistent with the prospect theory of Kahneman and Tversky (1978). We find that the agent is willing to hold a risky project with a relatively inferior Sharpe ratio if the project is currently making losses, and intends to liquidate...

This paper models financial contagion as a wealth effect of financial intermediaries in a market with two risky assets and three types of traders: noise traders who trade in one market, financial intermediaries who partially arbitrage away noise trading, and long-term investors who provide...

The past three decades have been characterized by vast change and crises in global financial markets—and not in politically unstable countries but in the heart of the developed world, from the Great Recession in the United States to the banking crises in Japan and the Eurozone. As we try to...