Reference Dependence and Market Participation

26 Pages Posted: 14 Aug 2017

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Andrea Meireles-Rodrigues

University of York - Department of Mathematics

Date Written: August 12, 2017

Abstract

This paper finds optimal portfolios for the reference-dependent preferences of Koszegi and Rabin, with piecewise linear gain-loss utility, in a one-period model with a safe and a risky asset. If the return of the risky asset is highly dispersed relative to its potential gains, two personal equilibria arise, one of them including risky investments, the other one only safe holdings. In the same circumstances, the risky personal equilibrium entails market participation that decreases with loss aversion and gain-loss sensitivity, whereas the preferred personal equilibrium is sensitive to market and preference parameters. Relevant market parameters are not the expected return and standard deviation, but rather the ratio of expected gains to losses and the Gini index of the return.

Keywords: loss aversion, market participation, personal equilibria, portfolio choice, reference dependence

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Guasoni, Paolo and Meireles-Rodrigues, Andrea, Reference Dependence and Market Participation (August 12, 2017). Available at SSRN: https://ssrn.com/abstract=3017830 or http://dx.doi.org/10.2139/ssrn.3017830

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Andrea Meireles-Rodrigues

University of York - Department of Mathematics ( email )

Heslington, York YO10 5DD
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
99
Abstract Views
876
Rank
397,440
PlumX Metrics