Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/34815
Title: A new characterization of comonotonicity and its application in behavioral finance
Authors: Xu, ZQ 
Keywords: Comonotonicity
Behavioral finance
Quantile formulation
Atomless/non-atomic
Pricing kernel
Cumulative prospect theory
Rank-dependent utility theory
Economic equilibrium model
Issue Date: 2014
Publisher: Academic Press
Source: Journal of mathematical analysis and applications, 2014, v. 418, no. 2, p. 612-625 How to cite?
Journal: Journal of mathematical analysis and applications 
Abstract: It is well-known that an Rn-valued random vector (X1,X2,⋯,Xn) is comonotonic if and only if (X1,X2,⋯,Xn) and (Q1(U),Q2(U),⋯,Qn(U)) coincide in distribution, for any random variable U uniformly distributed on the unit interval (0,1), where Qk(⋅) are the quantile functions of Xk, k=1,2,⋯,n. It is natural to ask whether (X1,X2,⋯,Xn) and (Q1(U),Q2(U),⋯,Qn(U)) can coincide almost surely for some special U. In this paper, we give a positive answer to this question by construction. We then apply this result to a general behavioral investment model with a law-invariant preference measure and develop a universal framework to link the problem to its quantile formulation. We show that any optimal investment output should be anti-comonotonic with the market pricing kernel. Unlike previous studies, our approach avoids making the assumption that the pricing kernel is atomless, and consequently, we overcome one of the major difficulties encountered when one considers behavioral economic equilibrium models in which the pricing kernel is a yet-to-be-determined unknown random variable. The method is applicable to general models such as risk sharing model.
URI: http://hdl.handle.net/10397/34815
ISSN: 0022-247X
EISSN: 1096-0813
DOI: 10.1016/j.jmaa.2014.03.053
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