This paper shows that the framework proposed by Barberis and Huang (2009) to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and...

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...

Starting from the reward-risk model for portfolio selection introduced in DeGiorgi (2005), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. In contrast to the mean-variance model, reward-risk portfolio selection arises from an...

The portfolio selection problem is traditionally modelled by two different approaches. The first one is based on an axiomatic model of risk-averse preferences, where decision makers are assumed to possess an expected utility function and the portfolio choice consists in maximizing the expected...

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

Using canonical data for the US stock and bond markets, we show that the kinked piecewise exponential value function can rationalize the cross-section of stock returns in addition to the level of the equity premium, while the kinked piecewise-power value function of Tversky and Kahneman can...

The portfolio selection problem is traditionally modelled by two different approaches. The first one is based on an axiomatic model of risk-averse preferences, where decision makers are assumed to possess a utility function and the portfolio choice consists in maximizing the expected utility...

The prospect theory of Kahneman and Tversky (in Econometrica 47(2), 263-291, 1979) and the cumulative prospect theory of Tversky and Kahneman (in J. Risk Uncertainty 5, 297-323, 1992) are descriptive models for decision making that summarize several violations of the expected utility theory....

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...