Dynamic trading with reference point adaptation and loss aversion

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

12 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)789-806
Journal / PublicationOperations Research
Volume63
Issue number4
Online published7 Jul 2015
Publication statusPublished - Jul 2015
Externally publishedYes

Abstract

We formalize the reference point adaptation process by relating it to a way people perceive prior gains and losses. We then develop a dynamic trading model with reference point adaptation and loss aversion, and derive its semi-analytical solution. The derived optimal stock holding has an asymmetric V-shaped form with respect to prior outcomes, and the related sensitivities are directly determined by the sensitivities of reference point shifts with respect to the outcomes. We also find that the effects of reference point adaptation can be used to shed light on some well documented trading patterns, e.g., house money, break even, and disposition effects.

Citation Format(s)

Dynamic trading with reference point adaptation and loss aversion. / Shi, Yun; Cui, Xiangyu; Yao, Jing; Li, Duan.

In: Operations Research, Vol. 63, No. 4, 07.2015, p. 789-806.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review