Prospect Theory and Stock Market Anomalies
Nicholas C. Barberis,
Lawrence Jin () and
No 27155, NBER Working Papers from National Bureau of Economic Research, Inc
We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors’ prior gains and losses, and makes quantitative predictions about an asset’s average return based on empirical estimates of its volatility, skewness, and past capital gain. We ﬁnd that the model is helpful for thinking about a majority of the 23 anomalies.
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Published as NICHOLAS BARBERIS & LAWRENCE J. JIN & BAOLIAN WANG, 2021. "Prospect Theory and Stock Market Anomalies," The Journal of Finance, vol 76(5), pages 2639-2687.
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