CAPM Equilibria with Prospect Theory Preferences

26 Pages Posted: 21 Jul 2003 Last revised: 6 Aug 2012

See all articles by Enrico G. De Giorgi

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Date Written: August 30, 2011

Abstract

Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium, the Security Market Line Theorem holds. However, under the functional form for the utility index suggested by Tversky and Kahneman (1992), the conditions for existence of financial market equilibria exclude economically meaningful equilibria. We suggest an alternative functional form that is consistent with both, the experimental results of Tversky and Kahneman (1992), and also with the existence of economically meaningful equilibria

Keywords: asset pricing, cumulative prospect theory, capital asset pricing model

JEL Classification: C62, D51, D52, G11, G12

Suggested Citation

De Giorgi, Enrico G. and Hens, Thorsten and Levy, Haim, CAPM Equilibria with Prospect Theory Preferences (August 30, 2011). Available at SSRN: https://ssrn.com/abstract=420184 or http://dx.doi.org/10.2139/ssrn.420184

Enrico G. De Giorgi (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Department of Economics
Bodanstrasse 6
CH-9000 St. Gallen
Switzerland
+41712242430 (Phone)

Thorsten Hens

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,427
Abstract Views
5,465
rank
12,582
PlumX Metrics