An Empirical Study on Value Functions of Stock Markets

Abstract:

As a core component of the prospect theory, a value function is employed to characterize the subjective experience of a decision-maker’s gain or loss. Previous empirical studies of the prospect theory were largely carried out through psychological experiments on individual decision-makers. In this paper, taking the whole stock market as an entity, we use the flow of information extracted by EGARCH Model as the proxy variable of change in wealth, and then use a two-stage power function as the representation of the value function to study the daily return data from the stock markets of 10 countries or regions. Empirical results show that the value functions of all the 10 stock markets present the shape of inverse-S, instead of the S-Shape of the value function generated by most psychological experiments on individuals.

• Periodical: Advanced Materials Research (Volumes 204-210)
• Pages: 899-906
• DOI: https://doi.org/10.4028/www.scientific.net/AMR.204-210.899
• Online since: February 2011
• Authors: Feng Hua Wen, Gui Tian Rao, Xiao Guang Yang
• Keywords: Information Sequence, Price Volatility, Prospect Theory, Value Function

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