Financial Market Equilibria with Cumulative Prospect Theory

28 November 2008
14:15
Enrico De Giorgi
Abstract
The paper shows that financial market equilibria need not exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. The reason is an infinite short-selling problem. But even when a short-sell constraint is added, non-existence can occur due to discontinuities in agents' demand functions. Existence of equilibria is established when short-sales constraints are imposed and there is also a continuum of agents in the market
  • Mathematical Finance Seminar