Can prospect theory explain anomalies in the Chinese stock market?

Zhiming Ao, Xinru Ji and Xinxin Liang

Finance Research Letters, 2023, vol. 58, issue PB

Abstract: To measure the decisive role of prospect theory, we use a quantitative model to test 15 anomalies in the Chinese stock market. The results show that when investors engage in prospect theory, two-thirds of the anomalies are made correct predictions within a reasonable parameter range. We reveal that prospect theory’s ability to explain market anomalies is primarily driven by loss aversion and diminishing sensitivity in China. When factoring in prior gains and losses, retail investors do not demonstrate a predilection for gambling on “lottery-type” stocks. We quantify prospect theory’s impact on Chinese stock pricing, proving psychological factors can be measured.

Keywords: Prospect theory; Asset pricing; Market anomaly; Chinese stock market (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pb:s1544612323008383

DOI: 10.1016/j.frl.2023.104466

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