14127_lec13buble

14127_lec13buble - 14.127 Behavioral Economics. Lecture 13...

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Unformatted text preview: 14.127 Behavioral Economics. Lecture 13 Xavier Gabaix May 6, 2004 bracketleftbigg parenleftBig parenrightBig 0.1 Prospect Theory and Asset Pricing Barberis, Huang, Santos, QJE 2001 t t c 1 V = max E 1 + b t t +1 v ( x t +1 ,s t ,z t ) bracketrightbigg S t dollar amount invested in stocks x t +1 = s t R t R rf where R t - stock return, R rf - risk-free rate Z t historical benchmark level for risky assets, z t = Z S t t the agent is in the domain of gains iff z t < 1 b t = b t c in order to have same rate of growth for both terms in the parentheses braceleftBigg braceleftBigg parenleftBig parenrightBig Dynamics z t +1 = z t R R t +1 + (1 ) 1 if x t +1 > 0 ith ( z t ) increasing in If z > 1 then v = x t +1 ( z t ) if x t +1 0 w z t ( z ) = + k ( z 1) R t +1 R rf if R t +1 z t R rf If z < 1 then v = s t R rf ( z t 1) + R t +1 z t R rf if R t +1 < z t R rf parenleftBigg...
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This note was uploaded on 12/26/2011 for the course ECON 14.127 taught by Professor Staff during the Fall '10 term at MIT.

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14127_lec13buble - 14.127 Behavioral Economics. Lecture 13...

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