Realization Utility with Reference-Dependent Preferences

We develop a tractable model of realization utility that studies the role of reference-dependent S-shaped preferences in a dynamic investment setting with reinvestment. Our model generates both voluntarily realized gains and losses. It makes specific predictions about the volume of gains and losses,...

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Veröffentlicht in:The Review of financial studies 2013-03, Vol.26 (3), p.723-767
Hauptverfasser: Ingersoll, Jonathan E., Jin, Lawrence J.
Format: Artikel
Sprache:eng
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Zusammenfassung:We develop a tractable model of realization utility that studies the role of reference-dependent S-shaped preferences in a dynamic investment setting with reinvestment. Our model generates both voluntarily realized gains and losses. It makes specific predictions about the volume of gains and losses, the holding periods, and the sizes of both realized and paper gains and losses that can be calibrated to a variety of statistics, including Odean's measure of the disposition effect. Our model also predicts several anomalies, including, among others, the flattening of the capital market line and a negative price for idiosyncratic risk.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhs116