Prospect theory for stock markets: Empirical evidence with time-series data

Zhang, Wenlang; Semmler, Willi

doi:10.1016/j.jebo.2009.08.003

Cited by 54 publications

(25 citation statements)

References 14 publications

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“…Dridi and Germain (2004) declare that the impact of investor sentiment on price is nonlinear in the bullish/ bearish market. The stock returns' response towards optimism is much stronger than the response to pessimism (Ding et al, 2004;Zhang and Semmler, 2009). It indicates that the existence of loss aversion could lead to investment losses.…”

Section: Literature Reviewmentioning

confidence: 95%

“…The reason is that investors evaluate values from gains and losses with respect to a specific reference, and their utility functions are unbalanced in gains and losses. Zhang and Semmler (2009) use the prospect theory to explain the reasons why investor sentiment has an asymmetric effect.…”

Section: Literature Reviewmentioning

confidence: 99%

“…They think that investor sentiment is crucial to affect stock returns because of limits of arbitrage, unexpected demand shock, unbalanced specific reference and utility functions in gain and loss. Some scholars also apply regression models to study how investor sentiment impacts stock price by using aggregate or industrial-level data in some countries, such as Schmeling (2009), McMillan (2003, Ding et al (2004), Zhang and Semmler (2009), Lee and Chiu (2012) and Chen (2013), etc. They find that investor sentiment is one of the underlying causes of nonlinearity and asymmetry in stock returns.…”

Section: Introductionmentioning

confidence: 99%

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Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model

2015

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Section: Literature Reviewmentioning

confidence: 95%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model

2015

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“…The loss in wealth appears to be more painful for those institutions since they have to adjust downward their operations. 38 For empirical results on prospect theory, using a Markov regime change model, see Zhang and Semmler (2005).…”

Section: Appendix a Details Of The Numerical Algorithmmentioning

confidence: 99%

Asset pricing with loss aversion

Grüne

Semmler

2008

Journal of Economic Dynamics and Control

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The use of standard preferences for asset pricing has not been very successful in matching asset price characteristics, such as the risk-free interest rate, equity premium and the Sharpe ratio, to time series data. Behavioral finance has recently proposed more realistic preferences such as those with loss aversion. Research is starting to explore the implications of behaviorally founded preferences for asset price characteristics. Encouraged by some studies of Benartzi and Thaler [1995. Myopic loss aversion and the equity premium puzzle. The Quarterly Journal of Economics 110 (1), 73-92] and Barberis et al. [2001. Prospect theory and asset prices. Quarterly Journal of Economics CXVI (1), 1-53] we study asset pricing with loss aversion in a production economy. Here, we employ a stochastic growth model and use a stochastic version of a dynamic programming method with an adaptive grid scheme to compute the above mentioned asset price characteristics of a model with loss aversion in preferences. As our results show using loss aversion we get considerably better results than one usually obtains from pure consumption-based asset pricing models including the habit formation variant. r

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“…Giorgi and Legg (2012) make use of the weighting function and show that dynamic models of portfolio choice might be consistently and meaningfully extended by the probability weighting. Zhang and Semmler (2009) further investigate properties of the model proposed by Barberis et al (2001) using time series data and conclude that models with PT features are able to better explain some financial 'puzzles', such as the equity premium puzzle. 5 Finally, for instance, Giorgi et al (2010) explore aspects of Cumulative Prospect Theory-a modification of the original PT developed by Tversky and Kahneman (1992)-and find that financial markets' equilibria need not exist under assumptions of PT.…”

Section: Relevance For Financial Marketsmentioning

confidence: 98%

Prospect Theory in the Heterogeneous Agent Model

Polách¹,

Kukačka

2018

J Econ Interact Coord

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Using the Heterogeneous Agent Model framework, we incorporate an extension based on Prospect Theory into a popular agent-based asset pricing model. The extension covers the phenomenon of loss aversion manifested in risk aversion and asymmetric treatment of gains and losses. Using Monte Carlo methods, we investigate behavior and statistical properties of the extended model and assess its relevance with respect to financial data and stylized facts. We show that the Prospect Theory extension keeps the essential underlying mechanics of the model intact, however, that it changes the model dynamics considerably. Stability of the model increases but the occurrence of the fundamental strategy is more extreme. Moreover, the extension shifts the model closer to the behavior of real-world stock markets. Terms of use: Documents in

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Prospect theory for stock markets: Empirical evidence with time-series data

Cited by 54 publications

References 14 publications

Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model

Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model

Asset pricing with loss aversion

Prospect Theory in the Heterogeneous Agent Model

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