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Prospect Theory and Higher Moments
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2006 (English)Report (Other (popular science, discussion, etc.))
Abstract [en]

The paper relates cumulative prospect theory to the moments of returns distributions, e.g. skewness and kurtosis, assuming returns are normal inverse Gaussian distributed. The normal inverse Gaussian distribution parametrizes the first- to forth-order moments, making the investigation straightforward. Cumulative prospect theory utility is found to be positively related to the skewness. However, the relation is negative when probability weighting is set aside. This shows that cumulative prospect theory investors display a prefer- ence for skewness through the probability weighting function. Furthermore, the investor’s utility is inverse hump-shape related to the kurtosis. Conse- quences for portfolio choice issues are studied. The findings, among others, suggest that optimal cumulative prospect theory portfolios are not mean- variance efficient under the normal inverse Gaussian distribution.

Place, publisher, year, edition, pages
Uppsala: Department of Economics, Uppsala University , 2006. , p. 31
Series
Working paper / Department of Economics, Uppsala University (Online), ISSN 1653-6975 ; 2006:24
Keywords [en]
cumulative prospect theory, skewness, kurtosis, normal inverse Gaussian distribution, portfolio choice
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:uu:diva-83261OAI: oai:DiVA.org:uu-83261DiVA, id: diva2:111168
Available from: 2006-10-26 Created: 2006-10-26 Last updated: 2013-11-15Bibliographically approved

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Ågren, Martin

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CiteExportLink to record
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Citation style
  • apa
  • ieee
  • modern-language-association
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
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  • fi-FI
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  • nn-NB
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Output format
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