Regret theory and equilibrium asset prices (Q1719375): Difference between revisions
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Property / author: Ji'an Wang / rank | |||
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Property / full work available at URL: https://doi.org/10.1155/2014/912652 / rank | |||
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Property / cites work: Advances in prospect theory: cumulative representation of uncertainty / rank | |||
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Property / cites work: Prospect Theory and Asset Prices / rank | |||
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Property / cites work: Regret in Decision Making under Uncertainty / rank | |||
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Property / cites work: Measuring and forecasting volatility in Chinese stock market using HAR-CJ-M model / rank | |||
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Latest revision as of 03:45, 18 July 2024
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English | Regret theory and equilibrium asset prices |
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Regret theory and equilibrium asset prices (English)
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8 February 2019
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Summary: Regret theory is a behavioral approach to decision making under uncertainty. In this paper we assume that there are two representative investors in a frictionless market, a representative active investor who selects his optimal portfolio based on regret theory and a representative passive investor who invests only in the benchmark portfolio. In a partial equilibrium setting, the objective of the representative active investor is modeled as minimization of the regret about final wealth relative to the benchmark portfolio. In equilibrium this optimal strategy gives rise to a behavioral asset priciting model. We show that the market beta and the benchmark beta that is related to the investor's regret are the determinants of equilibrium asset prices. We also extend our model to a market with multibenchmark portfolios. Empirical tests using stock price data from Shanghai Stock Exchange show strong support to the asset pricing model based on regret theory.
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