Capitalizing on prospect theory value: The Asian developed stock markets

Abstract

This study shows that a stock whose past return distribution has a high (low) prospect theory value earns a low (high) subsequent return in the stock markets in Hong Kong and Singapore as well as in Japan. In addition, it investigates whether appropriate components of the value function and the probability weighting function that capitalize on prospect theory value are different across countries due to the different risk attitudes of investors. The parameter estimates show that each stock market has different cumulative prospect theory parameters for better performance, and the level of loss aversion for each market is lower than the original values offered by Tversky and Kahneman (1992).