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Prospect Theory and Stock Market Anomalies

Barberis, Nicholas and Jin, Lawrence J. and Wang, Baolian (2021) Prospect Theory and Stock Market Anomalies. Journal of Finance, 76 (5). pp. 2639-2687. ISSN 0022-1082. doi:10.1111/jofi.13061. https://resolver.caltech.edu/CaltechAUTHORS:20210707-214808495

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Abstract

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 of the elements of prospect theory, accounts for investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of the asset's return volatility, return skewness, and past capital gain. We find that the model can help explain a majority of the 23 anomalies.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1111/jofi.13061DOIArticle
https://dx.doi.org/10.2139/ssrn.3477463DOIDiscussion Paper
Additional Information:© 2021 the American Finance Association. Issue Online: 03 September 2021; Version of Record online: 18 June 2021; Accepted manuscript online: 05 June 2021; Manuscript accepted: 25 January 2021; Manuscript received: 05 May 2020. We are grateful to Stefan Nagel (the Editor), the Associate Editor, two anonymous referees, John Campbell, Allen Hu, Alex Imas, Jonathan Ingersoll, Eben Lazarus, Erik Loualiche, Ian Martin, Dimitri Vayanos, Keith Vorkink, and seminar participants at Baruch College, Boston College, Caltech, the London Business School, the London School of Economics, Michigan State University, Princeton University, the University of California at Berkeley, the University of Maryland, the University of Miami, the University of Notre Dame, Washington University, Yale University, the AFA, the Miami Behavioral Finance conference, the NBER Behavioral Finance conference, and the SFS Cavalcade for very helpful comments. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Issue or Number:5
DOI:10.1111/jofi.13061
Record Number:CaltechAUTHORS:20210707-214808495
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20210707-214808495
Official Citation:BARBERIS, N., JIN, L.J. and WANG, B. (2021), Prospect Theory and Stock Market Anomalies. The Journal of Finance, 76: 2639-2687. https://doi.org/10.1111/jofi.13061
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:109753
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:08 Jul 2021 17:02
Last Modified:13 Sep 2021 20:18

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