Journal of Financial Economics Vol. 107 No. 3 2013
Prospect theory, the disposition effect, and asset prices
Abstract
We build a general equilibrium model to examine the implications of prospect theory for the disposition effect, asset prices, and trading volume. Diminishing sensitivity predicts a disposition effect, price momentum, a reduced return volatility, and a positive return-volume correlation. Loss aversion generally predicts the opposite. In calibrated economies, there is a nontrivial range of preference parameters for prospect theory to simultaneously explain the disposition effect, the momentum effect, and the equity premium puzzle. Our model is helpful for understanding a wide range of financial phenomena and it also suggests new testable predictions.
- DOI
- 10.1016/j.jfineco.2012.11.002
- Volume
- 107
- Issue
- 3
- Pages
- 715-739
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref