TY - JOUR
T1 - Prospect theory and stock returns
T2 - A seven factor pricing model
AU - Gregoriou, Andros
AU - Healy, Jerome
AU - Le, Thi Thu Huong
PY - 2019/5/2
Y1 - 2019/5/2
N2 - The single-factor Capital Asset Pricing Model (CAPM), and its multi-factor extensions, are models that seek to explain investor's expectations for returns on risky assets. Empirical studies however, show that these factor models do not fully explain variations in expected returns. We show that a simple two factor model, based on the Peak-end rule (Fredrickson & Kahneman, 1993) from Prospect Theory (Kahneman & Tversky, 1979, 1992) explains variations in asset returns more thoroughly than the CAPM or it's extensions. Our results are derived from an extensive study on all US listed securities over the time period of 1927–2014. Based on our findings, we propose a Seven-Factor asset pricing model merging the insights of Expected Utility Theory, and Prospect Theory. Our new model explains variations in asset returns more comprehensively than the CAPM and its extensions including the recently established five factor CAPM by Fama and French (2015).
AB - The single-factor Capital Asset Pricing Model (CAPM), and its multi-factor extensions, are models that seek to explain investor's expectations for returns on risky assets. Empirical studies however, show that these factor models do not fully explain variations in expected returns. We show that a simple two factor model, based on the Peak-end rule (Fredrickson & Kahneman, 1993) from Prospect Theory (Kahneman & Tversky, 1979, 1992) explains variations in asset returns more thoroughly than the CAPM or it's extensions. Our results are derived from an extensive study on all US listed securities over the time period of 1927–2014. Based on our findings, we propose a Seven-Factor asset pricing model merging the insights of Expected Utility Theory, and Prospect Theory. Our new model explains variations in asset returns more comprehensively than the CAPM and its extensions including the recently established five factor CAPM by Fama and French (2015).
KW - Prospect theory
KW - Peak-end rule
KW - Cognitive bias
KW - CAPM
UR - http://www.scopus.com/inward/record.url?scp=85064948702&partnerID=8YFLogxK
U2 - 10.1016/j.jbusres.2019.04.038
DO - 10.1016/j.jbusres.2019.04.038
M3 - Article
SN - 0148-2963
VL - 101
SP - 315
EP - 322
JO - Journal of Business Research
JF - Journal of Business Research
ER -