Effects of the fat-tail distribution on the relationship between prospect theory value and expected return |
| |
| Institution: | 1. Department of Tourism and Hospitality, TransWorld University, No. 1221, Zhennan Rd., Douliu City, Yunlin County 640, Taiwan;2. Department of Economics, Soochow University, No. 56, Kueiyang Street, Section 1, Taipei 100, Taiwan;1. Patrick E. Molony Professor, Department of Economics, Auburn University, 138 Miller Hall, Auburn, AL 36849, United States;2. Department of Economics, University of California Santa Cruz, 1156 High Street, Santa Cruz, CA 95064, United States;1. Department of Management Sciences, COMSATS University Islamabad, Attock Campus, Pakistan;2. Rennes School of Business, Rennes City, Brittany, France;3. Schulich School of Business, York University, Toronto, Canada;4. Department of Economics, Pusan National University, Busan, Republic of Korea;1. Research Center of the Central China for Economic and Social Development, Nanchang University, 330031 Nanchang, PR China;2. School of Economics and Management, Nanchang University, 330031 Nanchang, PR China;3. Business School, Hunan University, 410082 Changsha, PR China |
| |
| Abstract: | This study investigates the negative relationship between prospect theory value and expected return considering the fat-tail property of the return distribution. The results of both decile portfolio and cross-sectional regression show evidence supporting the hypothesis related to prospect theory value. However, these results are very sensitive to whether the model includes a short-term reversal factor. In the empirical design combining the hypothesis with the degree of fat-tail of the return distribution, stock groups with the fat-tail return distribution definitely show that prospect theory value has a significant information value for explaining expected return, regardless of whether the short-term reversal and other factors are included in the models. These results suggest that both the fat-tail property in the stock return distribution and the property of the skewed return distribution must be considered in examining the relationship between prospect theory value and expected return. Furthermore, our findings on the effects of the fat-tail property of the return distribution are verified through robustness testing while considering changes in empirical design and using out-of-sample stock markets of the U.S., Japan, and China, as well as the in-sample Korean stock market. |
| |
| Keywords: | Prospect theory value Decision weight Skewed distribution Fat-tail distribution Out-of-sample test |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
