Modeling nonlinear in Bowman’s paradox: the case of Pakistan

Farrukh Mahmood () and Robert Kunst ()
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Farrukh Mahmood: Information Technology University of Punjab

Empirical Economics, 2023, vol. 64, issue 5, No 14, 2357-2372

Abstract: Abstract Prospect theory frequently explains the empirical results of Bowman's paradox (negative relationship between risk and return). However, the empirical econometric model of these researches is misspecified. This study used a data-driven approach to improve the econometric model. Empirical results based on the improved econometric model are also reinforced by data visualization to be illustrated in depth. For this purpose, we used the data of 622 listed firms on the Pakistan Stock Exchange from 2000 to 2019. Our results contradict the literature on prospect theory based on the improved econometric model.

Keywords: Bowman’s paradox; Prospect theory; Modeling nonlinear relationship (search for similar items in EconPapers)
JEL-codes: C58 G32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-022-02308-3

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