Prospect Theory, Volatility Asymmetric And Asset Pricing

The phenomenon of asymmetric volatility is discovered widely in global financial markets by a number of empirical studies, and it has been the research focus in theory and practice. The asymmetric volatility which embodies the quality and efficiency of the stock market is not only an important factor which affects the asset pricing, the portfolio and the risk management but also an indicator which reflects the level of the stock market's development. Therefore, it is very important to study the intrinsic formation mechanism of the asymmetric volatility in order to understand and grasp the law of the financial markets.Specially, there are two parts in this paper:First, there are two classic explanations for the phenomenon of asymmetric volatility: "volatility feedback effect" and "leverage hypothesis". However, with further understanding this phenomenon, people began to question two explanations above by extensive researches. Meanwhile, a lot of researches tried to explore the causes of the volatility asymmetric from the perspective of investor psychology and behavior according to some theoretical work in behavioral finance. In the light of above-mentioned thinking, a kind of investor is specified with general decision preference characteristics on prospect theory. Then this paper applies the method of Agent-based Computational Finance (ACF) which has the natural advantage for this research, and explores the inherent formation mechanism of the volatility asymmetric adopting bottom-up modeling strategy from the scope of heterogeneous preferences investors'interaction. The obvious characteristic of this method is to model individual-orientedly, by which the wealth accumulation and decision-making preference of investors could be edited, so that it just provides us with a perfect technical foundation in order to bottom-up explore the phenomenon of volatility asymmetric conveniently from the perspective of investors'interaction with heterogeneous preferences .In addition, it is known that prospect theory has a profound effect on formation process of asset price, and plays an important role in finance market. Establishing a scientific and rational asset pricing model under prospect theory is very important for enhancing asset pricing efficiency, constructing investment portfolio strategies, improving risk management power. However, there are some deficiencies among these asset pricing models basing on prospect theory. Especially, these models do not deviate from the traditional asset pricing framework, and mainly use the piecewise linear value function, lastly induce that these models could not effectively reflect the real decision preferences or activities of investors and particularly lack the practical guidance value in the real market. Therefore, according to the foregoing analysis, this paper directly from the prospect theory further constructs a prospect theory-based asset pricing model adaptive under the background of China Securities Market. Lastly it has gotten the empirical support basing on China market data.In a word, this paper innovatively applied the method of Agent-based Computational Finance (ACF) to explain the phenomenon of volatility asymmetric from the scope of prospect theory, and constructed the prospect theory-based asset pricing model adaptive for the condition of China Securities Market, improving the behavioral asset pricing theory further.