Asset Pricing Model Based On Individual's Behavior

Finance is the most active part of the economy. Asset pricing theory is the core in the finance. This paper tries to establish asset pricing model on the basis of individual behavior to explain the abnormal phenomena of the financial market. Asset pricing theory developed with the development of incentive theory which describes individual behavior. Risk is the issue in the asset pricing.First, we point out pricing kernel is the centre of asset pricing model through retrospecting the literatures. Special case of pricing kernel varies with different asset pricing model.Second, this paper introduces utility value hierarchy based on the analysis of the external and internal incentives. It believes that human is natural one and material needs must be met. And, human is of social attributes and he has spirit needs. Spirit needs is composed of natural needs which human as animal must be met and social needs which human as factor of sociality must be met. Utility is correspondingly hierarchized such as money utility, emotion utility and trust and honor utility. These three utility value hierarchy are synthesized when individual maximize his utility. It can explain many decision behaviours.Next, this paper explores the discrepancy between stochastic dominance and cumulative prospect theory and introduces general first, second and prospect stochastic dominance. An important issue of asset pricing is correction of risk. Risk is independent of the utility function and relates to preference. The theory about preference-cumulative prospect theory should be compatible to the stochastic dominant theory about risk. This paper explores the discrepancy between prospect stochastic dominance (PSD) and cumulative prospect theory which is supported by the data in experiments of Levy.M and Levy.H. It point out PSD is based on the linear weight of probabilities, but the latter is based on the coded probabilities.Whether the probability is coded or not will affect the integrated outcomes and therefore influence the preference orders, thus presenting discrepancy between PSD and cumulative prospect theory. The paper introduces general first, second and prospect stochastic dominance. And it thinks there is weak discriminability in classical stochastic dominance theory as well...