Prospect theory and fat tails

Philip Maymin

Research output: Contribution to journalArticle

Abstract

A behavioral representative investor who evaluates a single risky asset based on cumulative prospect theory will often induce high kurtosis, negative skewness, and persistent autocorrelation into the distribution of market returns even if the asset payoffs are merely a sequence of independent coin tosses. These findings continue to hold even when the investor is simply loss averse.

Original languageEnglish (US)
Pages (from-to)187-195
Number of pages9
JournalRisk and Decision Analysis
Volume1
Issue number3
DOIs
StatePublished - Dec 1 2009

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Keywords

  • Loss aversion
  • behavioral
  • fat tails
  • kurtosis
  • prospect theory

ASJC Scopus subject areas

  • Statistics and Probability
  • Finance
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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