Fractional-moment CAPM with loss aversion

In this paper, we present a new fractional-order value function which generalizes the value function of Kahneman and Tversky [Kahneman D, Tversky A. Prospect theory: an analysis of decision under risk. Econometrica 1979;47:263-91; Tversky A, Kahneman D. Advances in prospect theory: cumulative representation of uncertainty.]. Risk Uncertainty 1992;4:297-323], and give the corresponding fractional-moment versions of CAPM in the cases of both the prospect theory [Kahneman D, Tversky A. Prospect theory: an analysis of decision under risk. Econometrica 1979;47:263-91; Tversky A, Kahneman D. Advances in prospect theory: cumulative representation of uncertainty. J. Risk Uncertainty 1992;4:297-323] and the expected utility model. The models that we obtain can be used to price assets when asset return distributions are likely to be asymmetric stable Levy distribution during panics and stampedes in worldwide security markets in 2008. In particular, from the prospect theory we get the following fractional-moment CAPM with loss aversion: E(R-i - R-0) = E[(W - W-0)(-)(-0.12)(R-i - R-0)]+ 2.25E[(W-0 - W)(+)(-0.12)(R-i - R-0)]/E[(W - W-0)(-)(-0.12)(W - R-0)] + 2.25E[(W-0 - W)(-)(-0.12)(W - R-0)].E(W - R-0), where W-0 is a fixed reference point distinguishing between losses and gains. Crown Copyright (C) 2009 Published by Elsevier Ltd. All rights reserved.