Prospect Theory And Stock Returns
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Prospect Theory And Stock Returns
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Author : Nicholas Barberis
language : en
Publisher:
Release Date : 2016
Prospect Theory And Stock Returns written by Nicholas Barberis and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
We test the hypothesis that, when thinking about allocating money to a stock, investors mentally represent the stock by the distribution of its past returns and then evaluate this distribution in the way described by prospect theory. In a simple model of asset prices where some investors think in this way, a stock whose past return distribution has a high (low) prospect theory value earns a low (high) subsequent return, on average. We find empirical support for this prediction in the cross-section of U.S. stock returns, particularly among small-capitalization stocks where less sophisticated investors are likely to have a bigger impact on prices. We repeat our tests in 46 international stock markets and find a similar pattern in a majority of these markets.
Prospect Theory Analysts Forecasts And Stock Returns
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Author : Raymond Seetoh
language : en
Publisher:
Release Date : 2004
Prospect Theory Analysts Forecasts And Stock Returns written by Raymond Seetoh and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004 with categories.
Prospect Theory Analyst Forecasts And Stock Returns
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Author : Charlie Charoenwong
language : en
Publisher:
Release Date : 2013
Prospect Theory Analyst Forecasts And Stock Returns written by Charlie Charoenwong and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
This paper documents how prospect theory can be used to explain stock returns and analysts' forecast behavior. Positive earnings surprises are associated with increases in abnormal returns but negative earnings surprises have only a limited negative impact on returns. We find that analysts display asymmetric behavior towards positive and negative earnings growth. Analysts' forecasts are found to be accurate during periods of positive earnings growth, but overly optimistic during periods of negative earnings growth. Our findings have implications for the structuring of investment products, as well as the role of market timing in their introduction.
High Idiosyncratic Volatility And Low Returns
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Author : Ajay Bhootra
language : en
Publisher:
Release Date : 2014
High Idiosyncratic Volatility And Low Returns written by Ajay Bhootra and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
The well-documented negative relationship between idiosyncratic volatility and stock returns is puzzling if investors are risk-averse. However, under prospect theory, while investors are risk-averse in the domain of gains, they exhibit risk-seeking behavior in the domain of losses. Consistent with risk-seeking investors' preference for high volatility stocks in the loss domain, we find that the negative relationship between idiosyncratic volatility and stock returns is concentrated in stocks with unrealized capital losses, but is non-existent in stocks with unrealized capital gains. This finding is robust to control for short-term return reversals and maximum daily return, among other variables.
Essays On Prospect Theory And Asset Pricing
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Author : Liyan Yang
language : en
Publisher:
Release Date : 2010
Essays On Prospect Theory And Asset Pricing written by Liyan Yang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
The financial markets are full of puzzles. In the aggregate market, stocks earn returns that cannot be justified by individual risk aversion (the equity premium puzzle); stock prices fluctuate much more than the underlying dividend process (the excess volatility puzzle); and stock returns can be predicted by many variables, such as dividend-to-price ratios or book-to-market ratios (the predictability puzzle). In the cross-section of stock returns, when stocks are sorted into different groups according to certain economic variables, including prior returns (the momentum puzzle), book-to-market ratio (the value premium puzzle), and size (the size puzzle), one group tends to earn higher average returns than another. At the individual trading level, a large body of evidence suggests that investors are reluctant to take losses (the disposition effect), tend to hold under-diversified portfolios (the under-diversification puzzle), and trade more than can be justified on rational grounds (the excessive trading puzzle). None of these facts can be explained by the traditional consumptionbased asset pricing models; they are thus labeled as anomalies. This study explores how models incorporating prospect theory preferences can improve our understanding of asset prices at both the aggregate market and individual stock levels. Chapter 1 studies a market-selection problem in an economy populated by Epstein-Zin investors and prospect theory investors. This chapter answers the questions of whether prospect theory investors can survive and have price impact in the long run, and thus, this chapter lays down the foundation for using prospect theory preferences to understand financial markets. Chapter 2 examines the implications of prospect theory preferences for the disposition effect, the momentum effect in the cross-section of stock returns, and the correlation between returns and volumes. Chapter 3 first provides strong empirical evidence for volatility clustering in the dividend growth rate process and then incorporates this feature into an asset pricing model with prospect theory investors to explore its implications for the aggregate stock market.
When Prospect Theory Preference Meets Mean Reverting Asset Returns
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Author : Jianjun Gao
language : en
Publisher:
Release Date : 2019
When Prospect Theory Preference Meets Mean Reverting Asset Returns written by Jianjun Gao and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
We examine how the evidence of mean-reversion in stock returns affects dynamic trading behavior for investors with prospect-theory preferences. Particular attention is paid to the trading incentives created by the interaction between prospect-theory preferences and mean-reverting return dynamics. Under general assumptions for the continuous-time financial market, we develop the semi-analytical portfolio policy by inverse Fourier Transformation method. By the revealed policy, we find that a small degree of mean reversion can be sufficient to reverse the direction of the investors' trading patterns. Further simulation results demonstrate that the combination of prospect theory and mean reversion can generate the disposition effect close to the data at the reasonable values of the underlying parameters. The results suggest that trading behavior patterns can be seriously misleading if the prospect theory allocation framework ignores time-variation in expected returns such as mean reversion.
Prospect Theory And Asset Prices
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Author : Nicholas Barberis
language : en
Publisher:
Release Date : 2011
Prospect Theory And Asset Prices written by Nicholas Barberis and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
We propose a new framework for pricing assets, derived in part from the traditional consumption-based approach, but which also incorporates two long-standing ideas in psychology: the prospect theory of Kahneman and Tversky (1979), and the evidence of Thaler and Johnson (1990) and others on the influence of prior outcomes on risky choice. Consistent with prospect theory, the investor in our model derives utility not only from consumption levels but also from changes in the value of his financial wealth. He is much more sensitive to reductions in wealth than to increases, the quot;loss-aversionquot; feature of prospect utility. Moreover, consistent with experimental evidence, the utility he receives from gains and losses in wealth depends on his prior investment outcomes; prior gains cushion subsequent losses -- the so-called quot;house-moneyquot; effect -- while prior losses intensify the pain of subsequent shortfalls. We study asset prices in the presence of agents with preferences of this type and find that our model reproduces the high mean, volatility, and predictability of stock returns. The key to our restuls is that the agent's risk-aversion changes over time as a function of his investment performance. This makes prices much more volatile than underlying dividends, and together with the investor's loss-aversion, leads to large equity premia. Our results obtain with reasonable values for all parameters.
Handbook Of The Fundamentals Of Financial Decision Making
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Author : Leonard C. MacLean
language : en
Publisher: World Scientific
Release Date : 2013
Handbook Of The Fundamentals Of Financial Decision Making written by Leonard C. MacLean and has been published by World Scientific this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Business & Economics categories.
This handbook in two parts covers key topics of the theory of financial decision making. Some of the papers discuss real applications or case studies as well. There are a number of new papers that have never been published before especially in Part II.Part I is concerned with Decision Making Under Uncertainty. This includes subsections on Arbitrage, Utility Theory, Risk Aversion and Static Portfolio Theory, and Stochastic Dominance. Part II is concerned with Dynamic Modeling that is the transition for static decision making to multiperiod decision making. The analysis starts with Risk Measures and then discusses Dynamic Portfolio Theory, Tactical Asset Allocation and Asset-Liability Management Using Utility and Goal Based Consumption-Investment Decision Models.A comprehensive set of problems both computational and review and mind expanding with many unsolved problems are in an accompanying problems book. The handbook plus the book of problems form a very strong set of materials for PhD and Masters courses both as the main or as supplementary text in finance theory, financial decision making and portfolio theory. For researchers, it is a valuable resource being an up to date treatment of topics in the classic books on these topics by Johnathan Ingersoll in 1988, and William Ziemba and Raymond Vickson in 1975 (updated 2 nd edition published in 2006).
Prospect Theory And Asset Prices
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Author : Nicholas Barberis
language : en
Publisher:
Release Date : 1999
Prospect Theory And Asset Prices written by Nicholas Barberis and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999 with Assets (Accounting) categories.
We propose a new framework for pricing assets, derived in part from the traditional consumption-based approach, but which also incorporates two long-standing ideas in psychology: prospect theory, and evidence on how prior outcomes affect risky choice. Consistent with prospect theory, the investor in our model derives utility not only from consumption levels but also from changes in the value of his financial wealth. He is much more sensitive to reductions in wealth than to increases, the loss-aversion'' feature of prospect utility. Moreover consistent with experimental evidence, the utility he receives from gains and losses in wealth depends on his prior investment outcomes; prior gains cushion subsequent losses -- the so-called 'house-money' effect -- while prior losses intensify the pain of subsequent shortfalls. We study asset prices in the presence of agents with preferences of this type, and find that our model reproduces the high mean, volatility, and predictability of stock returns. The key to our results is that the agent's risk-aversion changes over time as a function of his investment performance. This makes prices much more volatile than underlying dividends and together with the investor's loss-aversion, leads to large equity premia. Our results obtain with reasonable values for all parameters.
Prospect Theory And The Disposition Effect
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Author : Markku Kaustia
language : en
Publisher:
Release Date : 2008
Prospect Theory And The Disposition Effect written by Markku Kaustia and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
This paper shows that prospect theory is unlikely to explain the disposition effect. Prospect theory predicts that the propensity to sell a stock declines as its price moves away from the purchase price in either direction. Trading data, on the other hand, show that the propensity to sell jumps at zero return, but it is approximately constant over a wide range of losses, and increasing or constant over a wide range of gains. Further, the pattern of realized returns does not seem to stem from optimal after-tax portfolio rebalancing, a belief in mean-reverting returns, or investors acting on target prices.