The Evolution of Loss Aversion Coefficient in Energy Futures Market Considering Investor Heterogeneity

Abstract:

The energy futures market has become the center of global energy market, so, problems in the energy futures market have profound impact on many aspects of the macroeconomic. In this paper, with the premise of the existence of investor heterogeneity, we use stochastic Euler equation and prospect theory to establish a mathematical model of price fluctuations which varies with the time change, and the model is testable for generalized method of moment (GMM) model. According to the GMM estimation results, in the one-year period, when we set a certain time point to be the initial point, with the passage of time, loss aversion coefficient will gradually increase, while it will reduce with the increase of the discount factor. We also verify that the loss aversion coefficient of investors who response to market information rapidly is relatively small. But in the long term, the evolution of loss aversion coefficient needs further research.

• Periodical: Applied Mechanics and Materials (Volumes 291-294)
• Pages: 1263-1270
• DOI: https://doi.org/10.4028/www.scientific.net/AMM.291-294.1263
• Online since: February 2013
• Authors: Shu Ping Wang, Tao Wen, Zhen Xin Wu
• Keywords: GMM, Investor Heterogeneity, Loss Aversion, Prospect Theory

References

[1] Kahneman, D., Tversky, A: Prospect theory: An analysis of decisions under risk. Econometrica , Vol. 47(1979), p.263–291.

DOI: 10.2307/1914185

[2] Tversky,A., Kahneman, D：Loss aversion in riskless choice: A reference-dependent model. Quarterly Journal of Economics, Vol. 106(1991), p.1039–1061.

DOI: 10.2307/2937956

[3] Tversky,A., Kahneman, D: Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty , Vol. (1992), p.297–323.

DOI: 10.1007/bf00122574

[4] Wakker, P: The data of Levy and Levy Prospect Theory: Much ado about nothing? Actually support prospect theory. Management Science , Vol. 49(2002), p.979–981.

DOI: 10.1287/mnsc.49.7.979.16383

[5] Abdellaoui, M, Bleichrodt, H., Paraschiv, C.,. Loss aversion under prospect theory: A parameter-free measurement. Management Science , Vol. 53(2007), p.1659–1674.

DOI: 10.1287/mnsc.1070.0711

[6] Rina Rosenblatt-Wisch, Loss aversion in aggregate macroeconomic time series, European Economic Review , Vol. 52 (2008), p.1140–1159.

DOI: 10.1016/j.euroecorev.2007.12.001

[7] Lars Grune, Willi Semmler, Asset pricing with loss aversion, Journal of Economic Dynamics & Control Vol. 32 (2008), p.3253–3274.

DOI: 10.1016/j.jedc.2008.01.002

[8] David Fielding, Livio Stracca : Myopic loss aversion, disappointment aversion, and the equity premium puzzle, Journal of Economic Behavior & Organization, Vol. 64 (2007), p.250–268.

DOI: 10.1016/j.jebo.2005.07.004

[9] Abdellaoui, M., Bleichrodt, H., & Paraschiv, C: Loss aversion under prospect theory: A parameter-free measurement. Management Science, Vol. 53(2007), p.1659–1674.

DOI: 10.1287/mnsc.1070.0711

[10] Barberis, N., Huang, M., Santos, T.: Prospect theory and asset prices. Quarterly Journal of Economics, Vol. 116 ( 2000), p.1–53.

[11] Barberis, N., Huang, M: The loss aversion/narrow framing approach to the equity premium puzzles. In: Mehra, R. (Ed. ), Handbook of Investments: Equity Risk Premium. North Holland, Amsterdam, (2007).

DOI: 10.1016/b978-044450899-7.50011-7

[12] Benartzi, S., Thaler, R. H: Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics, Vol. 110(1995), p.73–92.

DOI: 10.2307/2118511

[13] Arkes, H.R., Hirshleifer, D.A., Jiang, D., Lim, S: Reference point adaptation: Tests in the domain of security trading. Organizational Behavior and Human Decision Processes , Vol. (2008), p.105, 67–81.

DOI: 10.1016/j.obhdp.2007.04.005

[14] Brooks,P., Zank, H: Loss averse behavior. Journal of Risk and Uncertainty, Vol. 31(2005), p.301–325.

DOI: 10.1007/s11166-005-5105-7

[15] Heath, C., Huddart, S., Lang, M: Psychological factors and stock option exercise. Quarterly Journal of Economics, Vol. 114(1999), p.601–627.

DOI: 10.1162/003355399556089