Prospect Theory and the Size and Value Premium Puzzles
10 Pages Posted: 13 Mar 2007
Date Written: December 22, 2005
Using canonical data for the US stock and bond markets, we show that the kinked piecewise exponential value function can rationalize the cross-section of stock returns in addition to the level of the equity premium, while the kinked piecewise-power value function of Tversky and Kahneman can explain only the latter.
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