|
EconStor >
Technische Universität Dresden >
Fakultät Wirtschaftswissenschaften, Technische Universität Dresden >
Dresden Discussion Paper Series in Economics, Faculty of Business and Economics, TU Dresden >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/39795
|
| | |
| Title: | | Prospect theory and hedging risks  |
| Authors: | | Broll, Udo Egozcue, Martín Wong, Wing-Keung Zitikis, Ričardas |
| Issue Date: | | 2010 |
| Series/Report no.: | | Dresden discussion paper series in economics 05/10 |
| Abstract: | | The prospect theory is one of the most popular decision-making theories. It is based on the S-shaped utility function, unlike the von Neumann and Morgenstern (NM) theory, which is based on the concave utility function. The S-shape brings in mathematical challenges: simple extensions and generalizations of NM theory into the prospect theory cannot be frequently achieved. For example, the nature of monotonicity of the indifference curve depends on the underlying mean. Price hedging decisions also become more complex within the prospect theory. We discuss these topics in detail and offer a general result concerning the sign of a covariance from which we then infer desired properties of the indifference curve and also justify hedging decisions within the prospect theory. We illustrate our general considerations with a thoroughly worked out example. |
| Subjects: | | prospect theory mean-variance model indifference curve price uncertainty hedging |
| JEL: | | D01 D03 D21 D81 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Dresden Discussion Paper Series in Economics, Faculty of Business and Economics, TU Dresden
|
| |
| | |
Download bibliographical data as:
BibTeX
|
| |
Share on:http://hdl.handle.net/10419/39795
|
Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.
|