 Prospect theory and stock returns: A seven factor pricing modelAndros Gregoriou, Jerome V. Healy and Huong Le Journal of Business Research, 2019, vol. 101, issue C, 315-322 Abstract: The single-factor Capital Asset Pricing Model (CAPM), and its multi-factor extensions, are models that seek to explain investor's expectations for returns on risky assets. Empirical studies however, show that these factor models do not fully explain variations in expected returns. We show that a simple two factor model, based on the Peak-end rule (Fredrickson & Kahneman, 1993) from Prospect Theory (Kahneman & Tversky, 1979, 1992) explains variations in asset returns more thoroughly than the CAPM or it's extensions. Our results are derived from an extensive study on all US listed securities over the time period of 1927–2014. Based on our findings, we propose a Seven-Factor asset pricing model merging the insights of Expected Utility Theory, and Prospect Theory. Our new model explains variations in asset returns more comprehensively than the CAPM and its extensions including the recently established five factor CAPM by Fama and French (2015). Keywords: Prospect theory; Peak-end rule; Cognitive bias; CAPM (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:101:y:2019:i:c:p:315-322 DOI: 10.1016/j.jbusres.2019.04.038 Access Statistics for this article Journal of Business Research is currently edited by A. G. Woodside More articles in Journal of Business Research from Elsevier |
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