Prospect Theory and Stock Market Anomalies - L. Jin - 1/31/2020

"Prospect Theory and Stock Market Anomalies"
Lawrence Jin, Assistant Professor of Finance, Caltech
Abstract: This talk discusses some recent development in the field of behavioral finance, with a focus on a new model of asset prices in which investors evaluate risk according to prospect theory. We examine the model's ability to explain prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes quantitative predications about an asset's average return. We find that the model is helpful for thinking about a majority of the anomalies we consider. It performs particularly well for the momentum, volatility, distress, and profitability anomalies, but poorly for the value anomaly.
Presented as part of the Caltech + Finance Symposium 2020
Friday, January 31, 2020, Dabney Lounge

[@tjsmind]

Great lecture!