Prospect Theory and Stock Market Anomalies
84 Pages Posted: 18 May 2020 Last revised: 12 Sep 2022
There are 2 versions of this paper
Prospect Theory and Stock Market Anomalies
10th Miami Behavioral Finance Conference
Number of pages: 83
Posted: 08 Nov 2019
Last Revised: 17 Dec 2020
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1,618
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: Suggested Citation
Barberis, Nicholas and Barberis, Nicholas and Jin, Lawrence J. and Wang, Baolian, Prospect Theory and Stock Market Anomalies (May 2020). NBER Working Paper No. w27155, Available at SSRN: https://ssrn.com/abstract=3603785
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