Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/174181 
Year of Publication: 
2016
Series/Report no.: 
IES Working Paper No. 14/2016
Publisher: 
Charles University in Prague, Institute of Economic Studies (IES), Prague
Abstract: 
Using the Heterogeneous Agent Model framework, we incorporate an extension based on Prospect Theory into a popular agent-based asset pricing model. The extension covers the phenomenon of loss aversion manifested in risk aversion and asymmetric treatment of gains and losses. Using Monte Carlo methods, we investigate behavior and statistical properties of the extended model and assess its relevance with respect to financial data and stylized facts. We show that the Prospect Theory extension keeps the essential underlying mechanics of the model intact, however, that it changes the model dynamics considerably. Stability of the model increases but the occurrence of the fundamental strategy is more extreme. Moreover, the extension shifts the model closer to the behavior of real-world stock markets.
Subjects: 
Heterogeneous Agent Model
Prospect Theory
behavioral finance
stylized facts
JEL: 
C1
C61
D84
G12
Document Type: 
Working Paper

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