Empirical Study On Value Functions Of Stock Markets

The Classical Finance is on the basic of rational man,it holds that individual decision-making under the uncertain conditions would strictly follow the EU. However, since the Allais paradox proposed by Allais in 1953,Experimental economics present many anomalies were inconsistent with expect utility theory in the field of individual choices and decisions,looking for new alternative theories to explain these anomalies has been a hotspot in financing research. There many theories have been put forward to explain anomalies,prospect theory,which was developed by 2002 Nobel economic prize winner—Kahneman and his partner Tversky in 1979 was the most influential.Prospect theory is descriptive,as the theory have been widely applied in finance,consumption, government decision-making and travel area, to empirical test it becomes more and more important.Value function is the core component of prospect theory,to describe the decision makers'subjective feelings of gain and loss.The value function has three important characteristics:the carrier of the value is the change of wealth, not final wealth.In the gain area, value function is concave, shows that decision-maker are risk aversion;meanwhile,in the losse area are convex, shows risk seeking. Decision-maker's attitude to change of wealth on loss is greater than gain.Therefore, the value of the function is S shapes.Previous empirical research of the prospect theory were almost through the psychology experiments,and research object were the individual decision makers. This paper reviews the prospect theory and introduces its newest development,then, introduces the basic characteristics of value function,the reference point, loss aversion coefficient, etc.in detail.Aim at the characteristics of value function,this paper takes ten countries'stock markets'investors as the object of study, uses the EGARCH model to extract information flow data as the proxy variable of the change of wealth.Next,this paper uses the power function of two stages as the expressive of value function,empirical research the date return data of ten countries'stock market.The result shows that the shape of value function in all the stock markets are presented inverse S,it's great different to individual decision makers's-shaped function in the psychological experiment.It can be explained by the behavior of chasing Shadie,which caused by special transport guild regulations of stock market. Loss aversion coefficients are greater than 1,except Austria and China.In this two countries,the investors are high speculation.Compared with preview empricial study of prospect theory,this research broke restrictions of experimental subject and experimental data in psychology experiment. In addition, this paper got great quantities of data, the data is not influenced by individual investors,thus,the result is more convincing.