Munich Personal RePEc Archive

Ex-ante Valuation based on Prospect Theory

Fang, Yi and Niu, Hui and Lin, Yuen (2023): Ex-ante Valuation based on Prospect Theory.

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We propose a simple algorithm for the ex-ante valuation based on prospect theory. Our results reveal a strong and robust pricing effect associated with predicted values based on prospect theory (PV) in the US market, that is, higher ex-ante PV stocks associated with higher returns. Our findings indicate no equilibrium exists for ex-ante PV. Our evidence shows liquidity has a limited impact on the ex-ante PV effect, which is mainly on liquid stocks. In general, liquidity, equilibrium, and the limits of arbitrage are crucial to understanding the ex-ante PV effect.

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