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Discrete Dynamics in Nature and Society
Volume 2014 (2014), Article ID 158386, 9 pages
Research Article

Investors’ Risk Preference Characteristics Based on Different Reference Point

School of Business, Central South University, Changsha, Hunan 410083, China

Received 6 January 2014; Accepted 12 March 2014; Published 9 April 2014

Academic Editor: Chuangxia Huang

Copyright © 2014 Fenghua Wen et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


Taking the stock market as a whole object, we assume that prior losses and gains are two different factors that can influence risk preference separately. The two factors are introduced as separate explanatory variables into the time-varying GARCH-M (TVRA-GARCH-M) model. Then, we redefine prior losses and gains by selecting different reference point to study investors’ time-varying risk preference. The empirical evidence shows that investors’ risk preference is time varying and is influenced by previous outcomes; the stock market as a whole exhibits house money effect; that is, prior gains can decrease investors’ risk aversion while prior losses increase their risk aversion. Besides, different reference points selected by investors will cause different valuation of prior losses and gains, thus affecting investors’ risk preference.