We propose a heuristic switching model of an asset market where the agents' choice of heuristic is consistent with their individual risk aversion. They choose between a fundamentalist and a trend-following rule to form expectations about the price of a risky asset. Given their risk aversion,...

In this paper, dynamic option-based investment strategies are derived and illustrated for investors exhibiting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions...

This paper studies the conjecture that investors prefer derivative markets over the equity market when hedging risks. An investor who wants to hedge, say inflation or crash risk, generally faces substantially more beta uncertainty in the stock market than in the derivatives market. We show that...

We study multi-period equilibrium asset pricing in an economy with Epstein-Zin (EZ-) agents whose preferences for consumption are represented by recursive utility and with loss averse (LA-) agents who derive additional utility of gains and losses and are averse to losses. We propose an...

This paper studies the wealth and pricing implications of loss aversion in the presence of arbitrageurs with Epstein-Zin preferences. Loss aversion affects an investor's survival prospects mainly through its effect on the investor's portfolio holdings. Loss-averse investors will be driven out of...

We study the relationship between stock market return expectations and risk aversion of individuals and test whether the joint effects arising from the interaction of these two variables affect investment decisions. Using data from the Dutch National Bank Household Survey, we find that risk...

Returns to both traditional and risk-managed momentum strategies are non-normal, reducing the efficacy of the Sharpe ratio as an evaluation tool. To account for the higher moments of the return distribution, we evaluate momentum using the framework of myopic loss aversion. Under this framework,...

Momentum strategies generate significant positive returns over long investment horizons; however these strategies experience infrequent periods of large negative returns. These periods are known as 'momentum crashes'. We demonstrate that the probability of a momentum crash is time-varying,...

The propensity of households to invest in stocks is lower than implied by Expected Utility Theory. One explanation suggested in the literature is that stocks entail ambiguity and investors are ambiguity averse. We test this hypothesis, measuring participation using equity fund flows and...

In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have non-zero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP) whose weights depend on information precisions...