We suggest a simple asset market model in which we analyze competitive and strategic behavior simultaneously. If two-fund separation is found to hold across periods for competitive behavior, it also holds for strategic behavior. In this case the relative prices of the assets do not depend on...

In June 2003 Swiss banks held over CHF 500 billion in mortgages. This important segment accounts for about 63% of all loan portfolios of Swiss banks. Since default insurance is not common in Switzerland, the corresponding risks are a severe threat for the health of the financial system. We...

The wealth dynamics of insurance companies strongly depends on the success of their investment strategies, but also on liquidity shocks which occur during unfavorable years, when indemnities to be paid to the clients exceed collected premia. An investment strategy that does not take liquidity...

This study investigates loss aversion when the reference point is state-dependent.Using a state-dependent structure, prospects are more attractive if they depend positively on the reference point and are less attractive in case of negative dependence. In addition, the structure is neutral in the...

The prospect theory of Kahneman and Tversky (1979) and the cumulative prospect theory of Tversky and Kahneman (1992) are descriptive models for decision making that summarize several violations of the expected utility theory. This paper gives a survey of applications of prospect theory to the...

In this paper we suggest a behavioral foundation for the reward-risk approach to portfolio selection based on prospect theory. We identify sufficient conditions for mutual fund separation in reward-risk models in general and for prospect theory in particular. It is shown that a prospect theory...

Markowitz and Sharpe won the Nobel Prize in Economics more than a decade ago for the development of Mean-Variance analysis and the Capital Asset Pricing Model (CAPM). In the year 2002, Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. Can these two apparently...

We develop an algorithm to compute asset allocations for Kahneman and Tversky's (1979) prospect theory. An application to benchmark data as in Fama and French (1992) shows that the equity premium puzzle is resolved for parameter values similar to those found in the laboratory experiments of...

Under the assumption of normally distributed returns, we analyzewhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)is consistent with the Capital Asset Pricing Model. We find that in everyfinancial market equilibrium the Security Market Line Theorem holds.However, under the...

We propose an affine term structure model which accommodates non-linearities in the drift and volatility function of the short-term interest rate. Such non-linearities are a consequence of discrete beta-distributed regime shifts constructed on multiple thresholds. We derive iterative closed form...