Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2005/20: Prospect Theory and the Size and Value Premium Puzzles

Enrico De Giorgi (), Thorsten Hens () and Thierry Post ()
Additional contact information
Enrico De Giorgi: Institute of Finance, University of Lugano, Postal: Institute of Finance, University of Lugano, Via Buffi 13, CH-6900 Lugano, Switzerland
Thorsten Hens: Institute for Empirical Research in Economics, University of Zurich, Postal: University of Zurich, Institute for Empirical Research in Economics, Bl├╝mlisalpstrasse 10, 8006 Z├╝rich, Switzerland
Thierry Post: Erasmus School of Economics, Erasmus University of Rotterdam, Postal: Erasmus University of Rotterdam, Erasmus School of Economics, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands

Abstract: Using canonical data for the US stock and bond markets, we show that the kinked piecewise exponential value function can rationalize the cross-section of stock returns in addition to the level of the equity premium, while the kinked piecewise-power value function of Tversky and Kahneman can explain only the latter.

Keywords: Prospect Theory; Premium Puzzles

JEL-codes: G00

9 pages, December 22, 2005

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