Return predictability of prospect theory: Evidence from the Thailand stock market

Xi Chen, Junbo Wang and Xiaoling Zhong

Pacific-Basin Finance Journal, 2024, vol. 83, issue C

Abstract: Using Thailand stock market data, we find that prospect theory has strong predictive power for returns. This predictive power is strengthened during crises and bear and bull markets. The loss aversion component is the main contributor to the increased predictive power during crises and bear markets. In contrast, the probability weighting and concavity/convexity components contribute more to the predictive power during bull markets. Prospect theory has stronger predictive power in the Market for Alternative Investment than in the Securities Exchange of Thailand, providing evidence that individual investors prefer the mental presentation effect and evaluate risk in a way described by prospect theory.

Keywords: Prospect theory; Probability weighting; Loss aversion; MAI and SET markets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23002706

DOI: 10.1016/j.pacfin.2023.102199

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