From boom 'til bust: how loss aversion affects asset prices

A Berkelaar, Roy Kouwenberg

Research output: Contribution to journalArticleAcademicpeer-review

18 Citations (Scopus)

Abstract

This article studies the impact of heterogeneous loss averse investors on asset prices. In very good states loss averse investors become gradually less risk averse as wealth rises above their reference point, pushing up equity prices. When wealth drops below the reference point the investors become risk seeking and demand for stocks increases drastically, eventually leading to a forced sell-off and stock market bust in bad states. Heterogeneity in reference points and initial wealth of the loss averse investors does not change the salient features of the equilibrium price process, such as a relatively high equity premium, high volatility and counter-cyclical changes in the equity premium.
Original languageEnglish
Pages (from-to)1005-1013
Number of pages9
JournalJournal of Banking and Finance
Volume33
Issue number6
DOIs
Publication statusPublished - 2009

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