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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Prospect Theory and Predictability of Market Returns: a Full Empirical Assessment |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 51 |
| Date | 2021 |
| Abstract Text | This paper tests the hypothesis that the tenets of the prospect theory can pre-dict the market aggregate returns. The hypothesis is tested in the 49 markets and uses both the parameters from Tversky and Kahneman (1992) as well as country specific parameters from Rieger et al. (2017). The results indicate that one cannot aggregate the results from the cross-section of stocks to the market level. Only few countries show the sign of the coeÿcient as predicted in previous works. Statistical significance is also rarely seen. The optimisation tests for the prospect theory value neither support nor reject the hypothesis stated previously. Various factors can play a role in determining the sign and significance of the coeÿcient, starting from the number of companies in the market index (concentration) and ending with the market capitalisation of the constituents (influence on the market index level). The only market where the premises of the prospect theory show negative coeÿcients and statistical significance is the small cap market. This paper contributes to the literature of behavioural factors influencing market returns and gives important impli-cations for future research in the area. |
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