Ex-ante Valuation based on Prospect Theory

Yi Fang, Hui Niu and Yuen Lin

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a simple algorithm for the ex-ante valuation based on prospect theory. Our results reveal a strong and robust pricing effect associated with predicted values based on prospect theory (PV) in the US market, that is, higher ex-ante PV stocks associated with higher returns. Our findings indicate no equilibrium exists for ex-ante PV. Our evidence shows liquidity has a limited impact on the ex-ante PV effect, which is mainly on liquid stocks. In general, liquidity, equilibrium, and the limits of arbitrage are crucial to understanding the ex-ante PV effect.

Keywords: ex-ante valuation; prospect theory; equilibrium; liquidity; crash; jackpot (search for similar items in EconPapers)
JEL-codes: G02 G11 G12 G14 G17 (search for similar items in EconPapers)
Date: 2023-01-01
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:116386

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