3:00 pm Monday, May 5, 2008
Math Finance: Prospect Theory, Behavioral Portfolio Choice, and Gambling Strategies by
Xunyu Zhou [mail] (University of Oxford) in RLM 10.176
In this talk I shall report recent progress on continuous-time behavioural portfolio choice under Kahneman and Tversky's (cumulative) prospect theory, featuring S-shaped utility functions and probability distortions. It is shown that the model well-posedness becomes a prominent issue in such a behavioural model. The optimal terminal wealth positions, derived in fairly explicit forms, possess surprisingly simple structure, leading to gambling strategies that bet on good states of the world while accepting fixed, known losses in case of bad ones. Time permitting I will also discuss on the incomplete market and single-period models as well as the equity premium puzzle. Submitted by
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