Review of Financial Studies Vol. 29 No. 11 2016
Prospect Theory and Stock Returns: An Empirical Test
Abstract
We test the hypothesis that, when thinking about allocating money to a stock, investors mentally represent the stock by the distribution of its past returns and then evaluate this distribution in the way described by prospect theory. In a simple model of asset prices in which some investors think in this way, a stock whose past return distribution has a high (low) prospect theory value earns a low (high) subsequent return, on average. We find empirical support for this prediction in the cross-section of stock returns in the U.S. market, and also in a majority of forty-six other national stock markets.
- Volume
- 29
- Issue
- 11
- Pages
- 3068-3107
- Sources
- bibtex:phds-export.bib