Probability distortion, asset prices, and economic growth

Publikation: Beitrag in FachzeitschriftArtikelForschungPeer-Review

Autoren

  • Maik Dierkes
  • Stephan Germer
  • Vulnet Sejdiu
Forschungs-netzwerk anzeigen

Details

OriginalspracheEnglisch
Aufsatznummer101476
FachzeitschriftJournal of Behavioral and Experimental Economics
Jahrgang84
Frühes Online-Datum4 Okt. 2019
PublikationsstatusVeröffentlicht - Feb. 2020

Abstract

In this paper, we link stock market investors’ probability distortion to future economic growth. The empirical challenge is to quantify the optimality of today's decision making to test for its impact on future economic growth. Fortunately, risk preferences can be estimated from stock markets. Using monthly aggregate stock prices from 1926 to 2015, we estimate risk preferences via an asset pricing model with Cumulative Prospect Theory (CPT) agents and distill a recently proposed probability distortion index. This index negatively predicts GDP growth in-sample and out-of-sample. Predictability is stronger and more reliable over longer horizons. Our results suggest that distorted asset prices may lead to significant welfare losses.

ASJC Scopus Sachgebiete

Fachgebiet (basierend auf ÖFOS 2012)

Ziele für nachhaltige Entwicklung

Zitieren

Probability distortion, asset prices, and economic growth. / Dierkes, Maik; Germer, Stephan; Sejdiu, Vulnet.
in: Journal of Behavioral and Experimental Economics, Jahrgang 84, 101476, 02.2020.

Publikation: Beitrag in FachzeitschriftArtikelForschungPeer-Review

Dierkes M, Germer S, Sejdiu V. Probability distortion, asset prices, and economic growth. Journal of Behavioral and Experimental Economics. 2020 Feb;84:101476. Epub 2019 Okt 4. doi: 10.1016/j.socec.2019.101476
Dierkes, Maik ; Germer, Stephan ; Sejdiu, Vulnet. / Probability distortion, asset prices, and economic growth. in: Journal of Behavioral and Experimental Economics. 2020 ; Jahrgang 84.
Download
@article{8547f69d90f047858bc14c2ae2e630da,
title = "Probability distortion, asset prices, and economic growth",
abstract = "In this paper, we link stock market investors{\textquoteright} probability distortion to future economic growth. The empirical challenge is to quantify the optimality of today's decision making to test for its impact on future economic growth. Fortunately, risk preferences can be estimated from stock markets. Using monthly aggregate stock prices from 1926 to 2015, we estimate risk preferences via an asset pricing model with Cumulative Prospect Theory (CPT) agents and distill a recently proposed probability distortion index. This index negatively predicts GDP growth in-sample and out-of-sample. Predictability is stronger and more reliable over longer horizons. Our results suggest that distorted asset prices may lead to significant welfare losses.",
keywords = "Economic growth, Probability distortion, Suboptimal decision making",
author = "Maik Dierkes and Stephan Germer and Vulnet Sejdiu",
note = "Funding information: We are particularly grateful to the Dr. Werner Jackst{\"a}dt Foundation for financial support. We thank an anonymous referee, Stefan Trautmann (the Editor), Florian Weigert, Giuliano Curatola, Ivalina Kalcheva, participants at the Swiss Finance Conference 2016, the German Finance Association Annual Meeting 2016, the Research in Behavioral Finance Conference 2016, and the Financial Management Association Annual Meeting 2018 for valuable comments and suggestions.",
year = "2020",
month = feb,
doi = "10.1016/j.socec.2019.101476",
language = "English",
volume = "84",
journal = "Journal of Behavioral and Experimental Economics",
issn = "2214-8043",
publisher = "Elsevier Inc.",

}

Download

TY - JOUR

T1 - Probability distortion, asset prices, and economic growth

AU - Dierkes, Maik

AU - Germer, Stephan

AU - Sejdiu, Vulnet

N1 - Funding information: We are particularly grateful to the Dr. Werner Jackstädt Foundation for financial support. We thank an anonymous referee, Stefan Trautmann (the Editor), Florian Weigert, Giuliano Curatola, Ivalina Kalcheva, participants at the Swiss Finance Conference 2016, the German Finance Association Annual Meeting 2016, the Research in Behavioral Finance Conference 2016, and the Financial Management Association Annual Meeting 2018 for valuable comments and suggestions.

PY - 2020/2

Y1 - 2020/2

N2 - In this paper, we link stock market investors’ probability distortion to future economic growth. The empirical challenge is to quantify the optimality of today's decision making to test for its impact on future economic growth. Fortunately, risk preferences can be estimated from stock markets. Using monthly aggregate stock prices from 1926 to 2015, we estimate risk preferences via an asset pricing model with Cumulative Prospect Theory (CPT) agents and distill a recently proposed probability distortion index. This index negatively predicts GDP growth in-sample and out-of-sample. Predictability is stronger and more reliable over longer horizons. Our results suggest that distorted asset prices may lead to significant welfare losses.

AB - In this paper, we link stock market investors’ probability distortion to future economic growth. The empirical challenge is to quantify the optimality of today's decision making to test for its impact on future economic growth. Fortunately, risk preferences can be estimated from stock markets. Using monthly aggregate stock prices from 1926 to 2015, we estimate risk preferences via an asset pricing model with Cumulative Prospect Theory (CPT) agents and distill a recently proposed probability distortion index. This index negatively predicts GDP growth in-sample and out-of-sample. Predictability is stronger and more reliable over longer horizons. Our results suggest that distorted asset prices may lead to significant welfare losses.

KW - Economic growth

KW - Probability distortion

KW - Suboptimal decision making

UR - http://www.scopus.com/inward/record.url?scp=85076114622&partnerID=8YFLogxK

U2 - 10.1016/j.socec.2019.101476

DO - 10.1016/j.socec.2019.101476

M3 - Article

AN - SCOPUS:85076114622

VL - 84

JO - Journal of Behavioral and Experimental Economics

JF - Journal of Behavioral and Experimental Economics

SN - 2214-8043

M1 - 101476

ER -