Prospect Theory in the Heterogeneous Agent Model

Arbeitspapier

Using the Heterogeneous Agent Model framework, we incorporate an extension based on Prospect Theory into a popular agent-based asset pricing model. The extension covers the phenomenon of loss aversion manifested in risk aversion and asymmetric treatment of gains and losses. Using Monte Carlo methods, we investigate behavior and statistical properties of the extended model and assess its relevance with respect to financial data and stylized facts. We show that the Prospect Theory extension keeps the essential underlying mechanics of the model intact, however, that it changes the model dynamics considerably. Stability of the model increases but the occurrence of the fundamental strategy is more extreme. Moreover, the extension shifts the model closer to the behavior of real-world stock markets.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IES Working Paper ; No. 14/2016

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Expectations; Speculations ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Heterogeneous Agent Model ; Prospect Theory ; behavioral finance ; stylized facts

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Polach, Jan ; Kukacka, Jiri
• Event: Veröffentlichung
• (who): Charles University in Prague, Institute of Economic Studies (IES)
• (where): Prague
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/174181
• Last update: 10.03.2025, 11:43 AM CET