A Behavioral Approach to Asset Pricing (Academic Press Advanced Finance)

Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. In this 2nd Edition Hersh Shefrin examines the reigning assumptions of asset pricing theory and reconstructs them to incorporate findings from behavioral finance. In other words, he takes the traditional tools in asset pricing and behavioralizes them. He constructs a solid, intact structure that challenges classic assumptions and at the same time provides a strong theory and efficient empirical tools. Building on the models developed by both traditional asset pricing theorists and behavioral asset pricing theorists, Shefrin's book takes the discussion to the next step. He provides a general behaviorally based intertemporal treatment of asset pricing theory that extends to the discussion of derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio, based on all the latest research and theory. * The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition * A companion website contains a series of examples worked out as Excel spreadsheets so that readers can input their own data to test the results Cover ......Page 1 Title ......Page 2 Copyright ......Page 3 Contents ......Page 6 Preface to Second Edition......Page 20 Preface to First Edition......Page 24 About the Author......Page 30 1 Introduction......Page 31 2 Representativeness and Bayes Rule: Psychological Perspective......Page 44 3 Representativeness and Bayes Rule: Economics Perspective......Page 53 4 A Simple Asset Pricing Model Featuring Representativeness......Page 61 5 Heterogeneous Judgments in Experiments......Page 73 6 Representativeness and Heterogeneous Beliefs Among Individual Investors, Financial Executives, and Academics......Page 88 7 Representativeness and Heterogeneity in the Judgments of Professional Investors......Page 102 8 A Simple Asset Pricing Model with Heterogeneous Beliefs......Page 123 9 Heterogeneous Beliefs and Inefficient Markets......Page 134 10 A Simple Market Model of Prices and Trading Volume......Page 149 11 Efficiency and Entropy: Long-Run Dynamics......Page 167 12 CRRA and CARA Utility Functions......Page 185 13 Heterogeneous Risk Tolerance and Time Preference......Page 199 14 Representative Investors in a Heterogeneous CRRA Model......Page 208 15 Sentiment......Page 226 16 Behavioral SDF and the Sentiment Premium......Page 243 17 Behavioral Betas and Mean-Variance Portfolios......Page 261 18 Cross-Section of Return Expectations......Page 279 19 Testing for a Sentiment Premium......Page 305 20 A Behavioral Approach to the Term Structure of Interest Rates......Page 315 21 Behavioral Black–Scholes......Page 326 22 Irrational Exuberance and Option Smiles......Page 345 23 Empirical Evidence in Support of Behavioral SDF......Page 366 24 Prospect Theory: Introduction......Page 396 25 Prospect Theory Portfolios......Page 423 26 SP/A Theory: Introduction......Page 433 27 SP/A-Based Behavioral Portfolio Theory......Page 441 28 Equilibrium with Behavioral Preferences......Page 464 29 The Disposition Effect: Trading Behavior and Pricing......Page 489 30 Reflections on the Equity Premium Puzzle......Page 507 31 Continuous Time Behavioral Equilibrium Models......Page 525 32 Conclusion......Page 551 References......Page 563 Index......Page 587 Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. Incorporating the latest research and theory, Shefrin offers both a strong theory and efficient empirical tools that address derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio. The book provides a series of examples to illustrate the theory. A companion website contains these examples worked out as Excel spreadsheets so that readers can input their own data to test the results.

* The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition
* A companion website contains a series of examples worked out as Excel spreadsheets so that readers can input their own data to test the results "Incorporating the latest theory and empirical research, the second edition of A Behavioral Approach to Asset Pricing provides the most up-to-date and comprehensive discussion of how psychology affects market activity. The key message remains: that the future of asset pricing theory lies in bringing together the powerful SDF-based tools adopted by neoclassical asset pricing theorists and the more realistic assumptions adopted by behavioral asset pricing theorists. The most important equation in the first edition is the decomposition of the log-SDF into sentiment and a fundamental component. In the second edition, Shefrin extends the analysis to demonstrate how this equation can be generalized to encompass the combination of behavioral preferences and behavioral beliefs. This generalization provides a unified approach that ties together the main ideas in the book."--Jacket