Asset prices and multiple reference points

This paper introduces multiple reference points in the traditional consumption-based asset pricing model of Lucas (1978). Following Barberis et al. (2001), we assume that an investor derives utility both from consumption and from changes (gains and losses) in the value of her financial wealth with respect to the initial endowment of a risky asset. We build upon Basili et al. (2005) and represent the investor's loss aversion over changes with respect to a set of reference points, instead of a single one, showing that this improves the descriptive ability of the cumulative prospect theory approach proposed by Barberis et al. (2001).