An Intertemporal Preference with Loss Aversion: Equilibrium Analysis

52 Pages Posted: 8 Nov 2019 Last revised: 8 Dec 2019

See all articles by Kyoung Jin Choi

Kyoung Jin Choi

University of Calgary - Haskayne School of Business

Junkee Jeon

Kyung Hee University - Department of Applied Mathematics

Hyeng Keun Koo

Ajou University - Department of Business Administration

Date Written: October 29, 2019

Abstract

We study a pure exchange economy with heterogeneous agents -- a loss averse agent and a non-loss averse agent. We derive the equilibrium allocations and prices in closed-form. The loss averse agent exhibits loss aversion to consumption changes with the most recent consumption as a reference point. The equilibrium consumption of the loss averse agent displays consumption ratcheting and the ``catching up with Joneses effect" without having external habit formation in her preference. The model can explain a number of stylized facts in the consumption data, including the excess smoothness and excess sensitivity of consumption, and the asymmetric sensitivities to income shocks. The model generates dynamics of the stock and bond prices consistent with their cyclical behavior and asset pricing moments are well matched with data by using reasonable parameter values. Furthermore, the model generates upward sloping, flat and downward sloping yield curves.

Keywords: Utility Costs, Ratcheting, Intertemporal Loss Aversion, Competitive Equilibrium, Asset Pricing, Equity Premium, Term Structure of Interest Rates, Catching up with Joneses

JEL Classification: D11, E21, G11

Suggested Citation

Choi, Kyoung Jin and Jeon, Junkee and Koo, Hyeng Keun, An Intertemporal Preference with Loss Aversion: Equilibrium Analysis (October 29, 2019). Available at SSRN: https://ssrn.com/abstract=3475159 or http://dx.doi.org/10.2139/ssrn.3475159

Kyoung Jin Choi

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://sites.google.com/site/kyoungjinchoiecon/

Junkee Jeon (Contact Author)

Kyung Hee University - Department of Applied Mathematics ( email )

1732 Deogyeong-daero, Giheung-gu,
Yongin, 130-701
Korea, Republic of (South Korea)

Hyeng Keun Koo

Ajou University - Department of Business Administration ( email )

206 Worldcup-ro
Yeongtong-gu
Suwon, 443-749
Korea, Republic of (South Korea)

Register to save articles to
your library

Register

Paper statistics

Downloads
15
Abstract Views
152
PlumX Metrics