STOCK PRICING MODEL BASED ON PROSPECT THEORY

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BARZIDEH FARROKH; KAFFASH PANJESHAHI MOHAMMAD; SHARIATPANAHI SEYED MAJID; TAGHAVIFARD MOHAMMAD TAGHI

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Journal: FINANCIAL RESEARCH Year:2016 | Volume:18 | Issue:1 Page(s): 59-76

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Title

STOCK PRICING MODEL BASED ON PROSPECT THEORY

Author(s)

BARZIDEH FARROKH | KAFFASH PANJESHAHI MOHAMMAD | SHARIATPANAHI SEYED MAJID | TAGHAVIFARD MOHAMMAD TAGHI | Issue Writer Certificate

Keywords

PROSPECT THEORYQ2

LOSS AVERSIONQ1

HOUSE MONEY EFFECTQ2

Abstract

This article investigates fluctuations in stocks prices at Tehran Stock Exchange, assuming that investors' utility stems from fluctuations in value of stocks as well as consumption. Thus, the two behavioral phenomena discussed in PROSPECT THEORY, i. e. LOSS AVERSION and HOUSE MONEY EFFECT, were factored into Consumption-based Asset Pricing Model and Investor's Utility Function, which takes into account utility both from consumption and financial investments. Price equations were defined in the two economic environments based on Lucas Theory (1978). The processes of consumption and dividend are equal in the first economy but different in the second economy. Next the P/D ratio was simulated in both economies and then compared with real market data. Utilizing ANOVA and K-Means, it became clear that the mean and standard deviation in the second economy are closer to real market data than those of the first economy. It, therefore, can be concluded that the second economy provides a more accurate estimation of the P/D ratio, implying that the aforementioned behavioral phenomena do in fact exist in the market and affect investors' pricing of stocks.

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APA: Copy

BARZIDEH, FARROKH, KAFFASH PANJESHAHI, MOHAMMAD, SHARIATPANAHI, SEYED MAJID, & TAGHAVIFARD, MOHAMMAD TAGHI. (2016). STOCK PRICING MODEL BASED ON PROSPECT THEORY. FINANCIAL RESEARCH, 18(1 ), 59-76. SID. https://sid.ir/paper/91199/en

Vancouver: Copy

BARZIDEH FARROKH, KAFFASH PANJESHAHI MOHAMMAD, SHARIATPANAHI SEYED MAJID, TAGHAVIFARD MOHAMMAD TAGHI. STOCK PRICING MODEL BASED ON PROSPECT THEORY. FINANCIAL RESEARCH[Internet]. 2016;18(1 ):59-76. Available from: https://sid.ir/paper/91199/en

IEEE: Copy

FARROKH BARZIDEH, MOHAMMAD KAFFASH PANJESHAHI, SEYED MAJID SHARIATPANAHI, and MOHAMMAD TAGHI TAGHAVIFARD, “STOCK PRICING MODEL BASED ON PROSPECT THEORY,” FINANCIAL RESEARCH, vol. 18, no. 1 , pp. 59–76, 2016, [Online]. Available: https://sid.ir/paper/91199/en

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