Prospect Theory and Stock Market Anomalies

84 Pages Posted: 18 May 2020 Last revised: 19 Nov 2021

See all articles by Nicholas Barberis

Nicholas Barberis

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

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 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 23 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 past capital gain. We find that the model is helpful for thinking about a majority of the 23 anomalies.

Suggested Citation

Barberis, Nicholas and Barberis, Nicholas and Jin, Lawrence J. and Wang, Baolian, Prospect Theory and Stock Market Anomalies (May 2020). Available at SSRN: https://ssrn.com/abstract=3603785

Nicholas Barberis (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)

Lawrence J. Jin

California Institute of Technology ( email )

1200 E. California Blvd.
MC 228-77
Pasadena, CA 91125
United States
626-395-4558 (Phone)

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
28
Abstract Views
562
PlumX Metrics