TITLE

A Note on a Framework to Assess the Required Equity Risk Premium Using Cumulative Prospect Theory

AUTHOR(S)
Holdsworth, Chris; Maré, Eben
PUB. DATE
February 2014
SOURCE
World Journal of Neuroscience;Feb2014, Vol. 4 Issue 1, p89
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
We provide a framework to ascertain the required equity risk premium (ERP) within the setting of Cumulative Prospect Theory (CPT) over arbitrary investment time periods. Once accounting for behavioral biases in estimating distributions (generated by using a simulation of asset returns based on a sampling procedure) and using a CPT utility function, it becomes apparent that the key determinant of the required ERP is an investor's time horizon.
ACCESSION #
94739644

 

Related Articles

  • Time-Varying Risk Attitude and Conditional Skewness. Zhifeng Liu; Tingting Zhang; Fenghua Wen // Abstract & Applied Analysis;2014, p1 

    Much literature finds that the skewness in the return distribution is negatively correlated with the risk premium coefficient, and speculation is the reason for the skewness in the return distribution. As further research, this paper, first taking up the time-varying property of the risk premium...

  • The Efficiency Analysis of Choices Involving Risk. Hanoch, G.; Levy, H. // Review of Economic Studies;Jul69, Vol. 36 Issue 3, p335 

    The article comments on the efficiency analysis of choices involving risk. The main conclusions to be derived from this analysis, are negative as well as positive. On the negative side, one has to be very critical of using automatically the mean-variance criterion for choice among risky...

  • Equilibrium in multicandidate probabilistic spatial voting. Tse-Min Lin; Enelow, James M.; Dorussen, Han // Public Choice;Jan1999, Vol. 98 Issue 1/2, p59 

    Presents the multicandidate spatial model of probabilistic voting. Discussions on the voter utility functions; Relation of equilibrium to degree of voter uncertainty; Indications of voter uncertainties by computer analysis.

  • The Ordering of Portfolios in Terms of Mean and Variance. Chipman, John S. // Review of Economic Studies;Apr73, Vol. 40 Issue 2, p167 

    This paper addresses itself to the following question: how can one characterize the class of expected utility functions U corresponding to a given family F of n-parameter distribution functions? In other words, what properties must a function U(m1, m2, …, mn) satisfy if it is to be an...

  • Analytical Valuation of Contingent Claims by Stochastic Interacting Systems for Stock Market. Jun Wang; Qiuyuan Wang; Jiguang Shao // Journal of Computers;Dec2008, Vol. 3 Issue 12, p3 

    In the present paper, by applying the theory of stochastic processes and interacting particle systems and models, including stopping time theory and stochastic voter model, we model a financial stock price model that contains two types of investors, and we use this financial model to describe...

  • Optimal Portfolio Selection Based on Expected Shortfall Under Generalized Hyperbolic Distribution. Surya, Budhi; Kurniawan, Ryan // Asia-Pacific Financial Markets;Sep2014, Vol. 21 Issue 3, p193 

    This paper discusses optimal portfolio selection problems under Expected Shortfall as the risk measure. We employ multivariate Generalized Hyperbolic distribution as the joint distribution for the risk factors of underlying portfolio assets, which include stocks, currencies and bonds. Working...

  • STOCHASTIC DOMINANCE TESTS FOR DECREASING ABSOLUTE RISK-AVERSION II: GENERAL RANDOM VARIABLES. Vickson, R. G. // Management Science;Jan1977, Vol. 23 Issue 5, p478 

    Necessary and sufficient conditions are given for stochastic dominance over the class of decreasing absolute risk-averse utility functions. The random variables being compared may be continuous as well as discrete but are assumed to be bounded from below, to have finite means, to have only...

  • DEPENDENT RISK MODELS WITH BIVARIATE PHASE-TYPE DISTRIBUTIONS. Badescu, Andrei L.; Cheung, Eric C. K.; Landriault, David // Journal of Applied Probability;Mar2009, Vol. 46 Issue 1, p113 

    In this paper we consider an extension of the Sparre Andersen insurance risk model by relaxing one of its independence assumptions. The newly proposed dependence structure is introduced through the premise that the joint distribution of the interclaim time and the subsequent claim size is...

  • Equity premium over different investment horizons. Lee, Eunhee; Kim, Chang; Kim, In-Moo // Empirical Economics;May2015, Vol. 48 Issue 3, p1169 

    This paper studies the adequate size of equity premium over different investment horizons based on spatial dominance. We find that the puzzle with respect to the size of equity premium disappears as investment horizons get longer in terms of the spatial dominance; therefore, the adequate size of...

Share

Read the Article

Courtesy of THE LIBRARY OF VIRGINIA

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics