An asset pricing based on regret theory

Regret theory is a behavioral approach to decision making under uncertain environment. This paper assume there are only two representative investors, a representative passive investor and a representative active investor in a frictionless market. The representative passive investor only invests on benchmark and the representative active investor select his own optimal portfolio based on regret theory. A behavioral asset pricing model is obtained when the market is clearing. The model suggests that the benchmark portfolio and the market portfolio are the determinants of capital assets equilibrium return. Also the coefficient of absolute risk aversion and regret aversion of representative investor are the pricing variable under regret.