Realization Utility with Reference-Dependent Preferences
The Review of Financial Studies (2013) 26 (3): 723-767.
48 Pages Posted: 1 Jan 2012 Last revised: 20 Feb 2013
Date Written: June 18, 2012
We develop a tractable model of realization utility that studies the role of reference-dependent S-shaped preferences in a dynamic investment setting with reinvestment. Our model generates both voluntarily realized gains and losses. It makes specific predictions about the volume of gains and losses, the holding periods, and the sizes of both realized and paper gains and losses that can be calibrated to a variety of statistics, including Odean’s measure of the disposition effect. Our model also predicts several anomalies including, among others, the flattening of the capital market line and a negative price for idiosyncratic risk.
Keywords: Realization Utility, Prospect Theory, Disposition Effect
JEL Classification: G02, G11, G12
Suggested Citation: Suggested Citation