From Boom 'til Bust : How Loss Aversion Affects Asset Prices

This article studies the impact of heterogeneous loss averse investors on asset prices. In very good states loss averse investors become gradually less risk averse as wealth rises above their reference point, pushing up equity prices. When wealth drops below the reference point the investors become risk seeking and demand for stocks increases drastically, eventually leading to a forced sell-off and stock market bust in bad states. Heterogeneity in reference points and initial wealth of the loss averse investors does not change the salient features of the equilibrium price process, such as a relatively high equity premium, high volatility and counter-cyclical changes in the equity premium.

Bibliographic Details

Main Authors:	Berkelaar, Arjan, Kouwenberg, Roy
Format:	Journal Article biblioteca
Language:	EN
Published:	2009
Subjects:	General Aggregative Models: Neoclassical E130, Portfolio Choice, Investment Decisions G110, Asset Pricing, Trading volume, Bond Interest Rates G120,
Online Access:	http://hdl.handle.net/10986/5411
Tags:	Add Tag No Tags, Be the first to tag this record!