Prospect Theory and Stock Market Anomalies

By Nicholas Barberis, Lawrence J. Jin, Baolian Wang. Journal of Finance, 2020

143 citations recorded by the source corpus.

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

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/bb3f660341e5a4bea965140e46e5361f33415642