Return predictability of prospect theory: Evidence from the Thailand stock market

Using Thailand stock market data, we find that prospect theory has strong predictive power for returns. This predictive power is strengthened during crises and bear and bull markets. The loss aversion component is the main contributor to the increased predictive power during crises and bear markets. In contrast, the probability weighting and concavity/convexity components contribute more to the predictive power during bull markets. Prospect theory has stronger predictive power in the Market for Alternative Investment than in the Securities Exchange of Thailand, providing evidence that individual investors prefer the mental presentation effect and evaluate risk in a way described by prospect theory.