{"title":"The market's implied loss aversion under power-log utility investor preferences","authors":"Jivendra K. Kale","doi":"10.1016/j.frl.2025.107154","DOIUrl":null,"url":null,"abstract":"<div><div>We use the equilibrium between equity-index spot and options markets, investor preferences modeled with Power-Log utility functions, and utility indifference pricing to estimate the market's implied loss aversion, and test prospect theory's and cumulative prospect theory's decreasing marginal sensitivity to losses postulate at the aggregate market level. We find that the equilibrium downside power in the Power-Log utility function is consistently and significantly negative, implying increasing marginal sensitivity and a concave utility function for losses. That contradicts prospect theory's and cumulative prospect theory's S-shaped value function at the aggregate market level.</div></div>","PeriodicalId":12167,"journal":{"name":"Finance Research Letters","volume":"78 ","pages":"Article 107154"},"PeriodicalIF":6.9000,"publicationDate":"2025-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Finance Research Letters","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1544612325004179","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"2025/3/8 0:00:00","PubModel":"Epub","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We use the equilibrium between equity-index spot and options markets, investor preferences modeled with Power-Log utility functions, and utility indifference pricing to estimate the market's implied loss aversion, and test prospect theory's and cumulative prospect theory's decreasing marginal sensitivity to losses postulate at the aggregate market level. We find that the equilibrium downside power in the Power-Log utility function is consistently and significantly negative, implying increasing marginal sensitivity and a concave utility function for losses. That contradicts prospect theory's and cumulative prospect theory's S-shaped value function at the aggregate market level.
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