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The New CAPM Model Based on Prospect Theory

Author: YuChengBo
Tutor: NiYunHu
School: Zhejiang University
Course: International Trade
Keywords: Expected utility theory Irrational Prospect Theory Capital Asset Pricing Model
CLC: F830
Type: Master's thesis
Year: 2004
Downloads: 584
Quote: 4
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Abstract


International monetary and financial activities of contemporary international economy and increasingly becoming an important part of trade, it is different from the traditional, narrow international trade. As a knowledge-intensive service commodity, currency and financial commodity prices, market exchange has its own unique pattern. Because of this, in Krugman (Paul R.Krugman, 2001) editor of the \This paper studies the open capital market prospect theory and the capital asset pricing model is a combination of problems. Expected utility theory has been put forward over half a century, as many economic models the theoretical foundation, however, a prerequisite for its overly demanding, especially consumers fully rational assumptions questioned by many. In 1978, the prospect theory put forward a direct challenge to its launch, after 20 years of testing and development, prospect theory has gradually matured. In this paper, consumer irrational premise, with prospect theory instead of the expected utility theory as the theory of capital asset pricing model based on re-derivation of the model, and found that the new model is more explanatory power of reality, has a certain theoretical and practical significance. The first part introduces the economics of uncertainty and irrational doctrine of historical development and research, particularly irrational doctrine of the synthesizer - the emergence and development of prospect theory. The second part of the modeling, analysis and certain non-rational decision-makers under the assumption of uncertainty decision problem. In generalized capital asset pricing model based on the derivation of a new capital asset pricing model. The third part of the original, the new capital asset pricing model, an empirical comparison. We collected evidence on four plates, 17 stocks of the sample data, and its regression analysis found that the new model is indeed more than the original model of interpretation and foresight. The fourth part we focused on the inadequacies of the model put forward in the direction of further research, and describes a new model for international economic significance. The greatest innovation of this paper is that the irrational factors into traditional asset model, making it closer to the real world, but a step. It is worth noting that this is not a general model, in addition to the strict assumptions, the mathematical model of prospect theory is far from perfect, so the new model also must be greater improvement. However, empirical results point of view, the conclusion of the new model is still acceptable, but the reality has a strong guiding significance.

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