Publication: From boom 'til bust: How loss aversion affects asset prices
Issued Date
2009-06-01
Resource Type
ISSN
03784266
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2-s2.0-62749138206
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Mahidol University
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SCOPUS
Bibliographic Citation
Journal of Banking and Finance. Vol.33, No.6 (2009), 1005-1013
Suggested Citation
Arjan Berkelaar, Roy Kouwenberg From boom 'til bust: How loss aversion affects asset prices. Journal of Banking and Finance. Vol.33, No.6 (2009), 1005-1013. doi:10.1016/j.jbankfin.2008.10.019 Retrieved from: https://repository.li.mahidol.ac.th/handle/20.500.14594/27529
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Title
From boom 'til bust: How loss aversion affects asset prices
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Abstract
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. © 2008 Elsevier B.V. All rights reserved.