Prospect Theory and Stock Market Anomalies

64 Pages Posted: 8 Nov 2019 Last revised: 6 May 2020

See all articles by Nicholas Barberis

Nicholas Barberis

Yale School of Management; National Bureau of Economic Research (NBER)

Lawrence J. Jin

California Institute of Technology

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2020

Abstract

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of its volatility, skewness, and capital gain overhang. We find that the model is helpful for thinking about a majority of the 22 anomalies.

Keywords: prospect theory, loss aversion, probability weighting, cross-section

JEL Classification: G11, G12

Suggested Citation

Barberis, Nicholas and Jin, Lawrence J. and Wang, Baolian, Prospect Theory and Stock Market Anomalies (May 5, 2020). 10th Miami Behavioral Finance Conference, Available at SSRN: https://ssrn.com/abstract=3477463 or http://dx.doi.org/10.2139/ssrn.3477463

Nicholas Barberis (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER)

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Lawrence J. Jin

California Institute of Technology ( email )

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HOME PAGE: http://www.hss.caltech.edu/content/lawrence-jin

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

HOME PAGE: http://www.wangbaolian.com

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