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Prospect theory and the CAPM : a contradiction or coexistence?

Levy, Haim; De Giorgi, Enrico; Hens, Thorsten
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http://hdl.handle.net/11250/163727
Issue date
2003-10
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  • Discussion papers (FOR) [461]
Abstract
Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium the Security Market Line Theorem holds. However, under the specific functional form suggested by Tversky and Kahneman (1992) financial market equilibria do not exist. We suggest an alternative functional form that is consistent with both, the experimental results of Tversky and Kahneman and also with the existence of equilibria.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2003:11

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