Cumulative Prospect Theory, Myopic Loss Aversion and Momentum Crashes
Cumulative Prospect Theory, Myopic Loss Aversion and Momentum Crashes

Author: Paul Docherty

Publisher:

Published: 2019

Total Pages: 35

ISBN-13:

DOWNLOAD EBOOK

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, increasing following periods of high market return dispersion, a proxy for a change in the market state. Under cumulative prospect theory, investors overweight the probability of a momentum crash when estimating their value function, discounting the current price of "winners" relative to "losers" resulting in positive expected future returns for the momentum strategy. Consistent with this theory, we show that momentum returns are substantially lower and volatility is higher in regimes where the probability of a momentum crash is high. Although momentum crashes are predictable they may not be exploited by institutional investors. Therefore, we argue that the negative (positive) skewness of the return distribution of winner (loser) portfolios is priced and may partly explain the momentum premium.

Cumulative Prospect Theory and Momentum Crashes
Cumulative Prospect Theory and Momentum Crashes

Author: Paul Docherty

Publisher:

Published: 2014

Total Pages: 21

ISBN-13:

DOWNLOAD EBOOK

We provide robust evidence of momentum crashes within the Asian region, which occurred following the Asian financial crisis and the global financial crisis. The probability of a momentum crash is time-varying; it increases after periods of low market returns and high cross-sectional return dispersion when the beta of the zero-investment momentum portfolio becomes negative. Under cumulative prospect theory, investors overweight the probability of a momentum crash when estimating their value function, resulting in the price of “winners” decreasing and future average returns increasing. Consistent with this theory, we show that momentum returns in Asia are substantially lower following periods where the probability of a momentum crash is higher. Therefore, we argue that the negative (positive) skewness of winner (loser) portfolios is priced and may explain the momentum premium.

Myopic Loss Aversion Revisited
Myopic Loss Aversion Revisited

Author: Pavlo R. Blavatskyy

Publisher:

Published: 2007

Total Pages: 21

ISBN-13:

DOWNLOAD EBOOK

When the performance of a risky asset is frequently assessed, the probability of detecting a loss is high, which averts the loss averse investors. This effect is known as myopic loss aversion (MLA). This paper reexamines several recent experimental studies documenting the existence of MLA. A closer look at the experimental data reveals that the effect of MLA is largely neutralized by the overweighting of small probabilities and the underweighting of moderate and high probabilities. Remarkably, the two effects exactly balance each other out for conventional parameterizations of cumulative prospect theory. MLA alone cannot explain the observed investment decisions.

Handbook of the Economics of Finance
Handbook of the Economics of Finance

Author: G. Constantinides

Publisher: Elsevier

Published: 2003-11-04

Total Pages: 698

ISBN-13: 9780444513632

DOWNLOAD EBOOK

Arbitrage, State Prices and Portfolio Theory / Philip h. Dybvig and Stephen a. Ross / - Intertemporal Asset Pricing Theory / Darrell Duffle / - Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance / Wayne E. Ferson / - Consumption-Based Asset Pricing / John y Campbell / - The Equity Premium in Retrospect / Rainish Mehra and Edward c. Prescott / - Anomalies and Market Efficiency / William Schwert / - Are Financial Assets Priced Locally or Globally? / G. Andrew Karolyi and Rene M. Stuli / - Microstructure and Asset Pricing / David Easley and Maureen O'hara / - A Survey of Behavioral Finance / Nicholas Barberis and Richard Thaler / - Derivatives / Robert E. Whaley / - Fixed-Income Pricing / Qiang Dai and Kenneth J. Singleton.

Investor Behavior
Investor Behavior

Author: H. Kent Baker

Publisher: John Wiley & Sons

Published: 2014-02-10

Total Pages: 645

ISBN-13: 1118492986

DOWNLOAD EBOOK

WINNER, Business: Personal Finance/Investing, 2015 USA Best Book Awards FINALIST, Business: Reference, 2015 USA Best Book Awards Investor Behavior provides readers with a comprehensive understanding and the latest research in the area of behavioral finance and investor decision making. Blending contributions from noted academics and experienced practitioners, this 30-chapter book will provide investment professionals with insights on how to understand and manage client behavior; a framework for interpreting financial market activity; and an in-depth understanding of this important new field of investment research. The book should also be of interest to academics, investors, and students. The book will cover the major principles of investor psychology, including heuristics, bounded rationality, regret theory, mental accounting, framing, prospect theory, and loss aversion. Specific sections of the book will delve into the role of personality traits, financial therapy, retirement planning, financial coaching, and emotions in investment decisions. Other topics covered include risk perception and tolerance, asset allocation decisions under inertia and inattention bias; evidenced based financial planning, motivation and satisfaction, behavioral investment management, and neurofinance. Contributions will delve into the behavioral underpinnings of various trading and investment topics including trader psychology, stock momentum, earnings surprises, and anomalies. The final chapters of the book examine new research on socially responsible investing, mutual funds, and real estate investing from a behavioral perspective. Empirical evidence and current literature about each type of investment issue are featured. Cited research studies are presented in a straightforward manner focusing on the comprehension of study findings, rather than on the details of mathematical frameworks.

Prospect Theory
Prospect Theory

Author: Peter P. Wakker

Publisher: Cambridge University Press

Published: 2010-07-22

Total Pages: 519

ISBN-13: 1139489100

DOWNLOAD EBOOK

Prospect Theory: For Risk and Ambiguity, provides a comprehensive and accessible textbook treatment of the way decisions are made both when we have the statistical probabilities associated with uncertain future events (risk) and when we lack them (ambiguity). The book presents models, primarily prospect theory, that are both tractable and psychologically realistic. A method of presentation is chosen that makes the empirical meaning of each theoretical model completely transparent. Prospect theory has many applications in a wide variety of disciplines. The material in the book has been carefully organized to allow readers to select pathways through the book relevant to their own interests. With numerous exercises and worked examples, the book is ideally suited to the needs of students taking courses in decision theory in economics, mathematics, finance, psychology, management science, health, computer science, Bayesian statistics, and engineering.

Handbook of Behavioral Economics - Foundations and Applications 1
Handbook of Behavioral Economics - Foundations and Applications 1

Author:

Publisher: Elsevier

Published: 2018-09-27

Total Pages: 749

ISBN-13: 0444633898

DOWNLOAD EBOOK

Handbook of Behavioral Economics: Foundations and Applications presents the concepts and tools of behavioral economics. Its authors are all economists who share a belief that the objective of behavioral economics is to enrich, rather than to destroy or replace, standard economics. They provide authoritative perspectives on the value to economic inquiry of insights gained from psychology. Specific chapters in this first volume cover reference-dependent preferences, asset markets, household finance, corporate finance, public economics, industrial organization, and structural behavioural economics. This Handbook provides authoritative summaries by experts in respective subfields regarding where behavioral economics has been; what it has so far accomplished; and its promise for the future. This taking-stock is just what Behavioral Economics needs at this stage of its so-far successful career. Helps academic and non-academic economists understand recent, rapid changes in theoretical and empirical advances within behavioral economics Designed for economists already convinced of the benefits of behavioral economics and mainstream economists who feel threatened by new developments in behavioral economics Written for those who wish to become quickly acquainted with behavioral economics

Encyclopedia of Finance
Encyclopedia of Finance

Author: Cheng-Few Lee

Publisher: Springer Science & Business Media

Published: 2006-07-27

Total Pages: 861

ISBN-13: 0387262849

DOWNLOAD EBOOK

This is a major new reference work covering all aspects of finance. Coverage includes finance (financial management, security analysis, portfolio management, financial markets and instruments, insurance, real estate, options and futures, international finance) and statistical applications in finance (applications in portfolio analysis, option pricing models and financial research). The project is designed to attract both an academic and professional market. It also has an international approach to ensure its maximum appeal. The Editors' wish is that the readers will find the encyclopedia to be an invaluable resource.

Behavioralizing Finance
Behavioralizing Finance

Author: Hersh Shefrin

Publisher: Now Publishers Inc

Published: 2010

Total Pages: 196

ISBN-13: 1601983301

DOWNLOAD EBOOK

Behavioralizing Finance provides a structured approach to behavioral finance in respect to underlying psychological concepts, formal framework, testable hypotheses, and empirical findings.