Publication detail

Prospect Theory in the heterogeneous agent model

Author(s): PhDr. Jiří Kukačka Ph.D., Jan Polach
Type: Articles in journals with impact factor
Year: 2019
Number: 0
ISSN / ISBN:
Published in: Journal of Economic Interaction and Coordination, 14 (1), pp. 147-174, DOI
Publishing place:
Keywords: heterogeneous agent model, Prospect Theory, behavioral finance, stylized facts
JEL codes: C1, C61, D84, G12
Suggested Citation: Polach, J., Kukacka, J. (2019). Prospect Theory in the heterogeneous agent model. Journal of Economic Interaction and Coordination, 14 (1), pp. 147-174.
Grants: DYME – Dynamic Models in Economics
Abstract: Using the Heterogeneous Agent Model framework, we incorporate an extension based on Prospect Theory into a popular agent-based asset pricing model. The extension covers the phenomenon of loss aversion manifested in risk aversion and asymmetric treatment of gains and losses. Using Monte Carlo methods, we investigate behavior and statistical properties of the extended model and assess its relevance with respect to financial data and stylized facts. We show that the Prospect Theory extension keeps the essential underlying mechanics of the model intact, however, that it changes the model dynamics considerably. Stability of the model increases but the occurrence of the fundamental strategy is more extreme. Moreover, the extension shifts the model closer to the behavior of real-world stock markets.

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