Risk Measure At The Belief Of Overconfidence

Behavioral finance is the study of how investors allocate their risky assets when they face the uncertainty in accordance with the practitioners' behavior in the financial market.It derives from psychological principles,focusing on the influence of human behavior on the decision making and asset pricing.Behavioral finance developed in the process of oppugning and challenging the classical financial theories-Capital Asset Pricing Model and Efficient Market Hypothesis,its fundamental content includes Limited Arbitrage Theory and Irrational Behavioral Patterns, which explain many anomalies in the financial market,and Prospect Theory and Behavioral Asset Pricing Model have been created in this field.Among those irrational behavioral patterns,overconfidence is a typical and ubiquitous cognitive dissonance.People are always overconfident on their judgments and overestimate their probability to win,they contribute the success to their ability, but ascribe the failure to objective conditions,which will lead the investors to overestimate the accuracy of the information but reduce their ability of anglicizing the information,resulting that they wrongly evaluate their risk.VaR is one important tool which use a data to evaluate the risk of a financial asset.Generally speaking,VaR is the maximum loss not exceeded with a given probability defined as the confidence level,over a given period of time under the normal market condition.Risk premium is the proper reward giving the investors for that they take part in a fair game;it is able to precisely calculate the degree of the investors' risk aversion.In this paper we construct the risk measure model at the belief of overconfidence in profit of the VaR and Risk Premium,and give a direct estimate of the investors' overconfident degree and the influence on their decision making,which is consistent with the phenomenon in the financial market.The first chapter is introduction,telling the history,the core theories and the actuality of Behavioral Finance and the related production of both domestic and foreign academicians in this field.The second chapter introduces the psychology of overconfidence and its influence on investors' behavior.In the third chapter, we construct the asset pricing model at the belief of overconfidence,inducting the overconfident coefficient and analyzing its influence on risky asset pricing,then concluding that the self-contribution bias will result in the limit of the arbitrage in the market.In chapter 4,we give the value at risk of the rational investors and overconfident investors,and directly evaluate the risk error between them.In chapter 5,we construct the dynamic risk premium model at the belief of overconfidence and dedicate that overconfidence will lead to the overtrade,We give the main conclusions in Chapter 6.