A behavioral approach to asset pricing

A behavioral approach to asset pricing

Economic
Economic Behavior

the most important feature of the approach in this book is that it provides a theoretical structure to analyze the impact of behavioral beliefs and preferences on all asset prices through the SDF. In this respect, the approach in this paper develops testable hypotheses about the shape of the SDF function. These hypotheses link the empirical evidence on investor expectations to the shape of the empirical SDF. Unlike the downward sloping SDF found in traditional theory, a typi-cal behavioral SDF oscillates. The theory developed in this book provides hypotheses for how the distribution of investor errors generates particular oscillations in the SDF. In other words, oscillations in the graph of the SDF
are not arbitrary residual variables that, for lack of an alternative explana-tion, are attributed to investor sentiment. Rather, empirical evidence about investor errors is presented and, in conjunction with the theory, used to develop hypotheses about the oscillating patterns in the SDF

Hersh Shefrin.

Elsevier’s Science & Technology Rights Department in Oxford

Elsevier Academic Press

2005

Novita

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English

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