The effects of fat-tail return distribution on the relationship between the prospect theory value and future return

Document Type : Original Article

Authors
hamzeh hosseinpour
Ahmad Khodamipour
pourheidari omid
Department of Accounting, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran
10.30495/jik.2025.23657
Abstract
After the presentation of the prospect theory by Kahneman and Tversky (1979), the attention of many researchers has been drawn to further study of this theory. According to research, assuming that for many investors a mental representation of stocks is created through the distribution of past stock returns, the prospect theory value can be considered as an indicator of this mental representation. It is also expected that since the return distribution follows the fat tail property distributions, this relationship will be greater at the fatness of the tail parts. so the purpose of this study is to investigate the relationship between the prospect theory value and stock returns by considering the fat tail property distribution of return. The statistical population of this study is the companies listed on the Tehran Stock Exchange during the years 2006 to 2019. In this research, the approach of portfolio construction as well as alpha analysis of factor models and in the end, in order to supplemental analysis and robustness of the results, regression method has been used. The results show that there is a negative and significant relationship between future stock returns and the prospect theory value and also this relationship is more severe at the fatness of the tail parts than the central part. In other words, the results indicate that investors pay more attention to the extreme values of returns than to the central part of returns distribution.
Keywords
prospect theory value
stock return
fat tail distribution
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