Prospect Theory and Stock Price Behavior in Retail Trading Booms

Xu Guo; Junbo Wang; Chunchi Wu; Xiaoling Zhong

doi:10.1016/j.jempfin.2026.101706

Prospect Theory and Stock Price Behavior in Retail Trading Booms

Xu Guo, Junbo Wang^*, Chunchi Wu, Xiaoling Zhong^*

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

Abstract

We employ prospect theory, an influential theory describing investors’ attitudes toward risk, to explain the effects of the unprecedented retail investor engagement and market performance in recent times. We find that prospect theory value (PTV) has strong predictive power for returns during retail trading booms, and this predictability is stronger for stocks with high investor attention and less subject to arbitrage forces. The retail wave during the COVID-19 pandemic propels PTV’s predictive power in a way unseen in other historical crises. The high predictability of returns is attributable to attention-grabbing social media, fintech brokerage, investor sentiment, and government stimulus policy.

Original language	English
Journal	Journal of Empirical Finance
DOIs	https://doi.org/10.1016/j.jempfin.2026.101706
Publication status	Accepted/In press/Filed - 24 Feb 2026

Funding

Junbo Wang acknowledges financial support from the Research Grants Council of the Hong Kong Special Administrative Region, China (GRF9043444). Xiaoling Zhong acknowledges financial support from the Stabilization Support Program 2022 for Higher Education Institutions of Shenzhen (Grant 20220818193126001) and the Innovation Program of Guangdong Provincial Department of Education (Grant 2022WTSCX124).

Research Keywords

Prospect theory
probability weighting
COVID-19 pandemic
retail trading
volatility

RGC Funding Information

RGC-funded

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10.1016/j.jempfin.2026.101706

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GRF: The Portfolio Choice of Mutual Funds
WANG, J. (Principal Investigator / Project Coordinator) & WANG, C. (Co-Investigator)
1/01/23 → …
Project: Research

Cite this

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title = "Prospect Theory and Stock Price Behavior in Retail Trading Booms",

abstract = "We employ prospect theory, an influential theory describing investors{\textquoteright} attitudes toward risk, to explain the effects of the unprecedented retail investor engagement and market performance in recent times. We find that prospect theory value (PTV) has strong predictive power for returns during retail trading booms, and this predictability is stronger for stocks with high investor attention and less subject to arbitrage forces. The retail wave during the COVID-19 pandemic propels PTV{\textquoteright}s predictive power in a way unseen in other historical crises. The high predictability of returns is attributable to attention-grabbing social media, fintech brokerage, investor sentiment, and government stimulus policy.",

keywords = "Prospect theory, probability weighting, COVID-19 pandemic, retail trading, volatility",

author = "Xu Guo and Junbo Wang and Chunchi Wu and Xiaoling Zhong",

year = "2026",

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day = "24",

doi = "10.1016/j.jempfin.2026.101706",

language = "English",

journal = "Journal of Empirical Finance",

issn = "0927-5398",

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AU - Guo, Xu

AU - Wang, Junbo

AU - Wu, Chunchi

AU - Zhong, Xiaoling

PY - 2026/2/24

Y1 - 2026/2/24

N2 - We employ prospect theory, an influential theory describing investors’ attitudes toward risk, to explain the effects of the unprecedented retail investor engagement and market performance in recent times. We find that prospect theory value (PTV) has strong predictive power for returns during retail trading booms, and this predictability is stronger for stocks with high investor attention and less subject to arbitrage forces. The retail wave during the COVID-19 pandemic propels PTV’s predictive power in a way unseen in other historical crises. The high predictability of returns is attributable to attention-grabbing social media, fintech brokerage, investor sentiment, and government stimulus policy.

AB - We employ prospect theory, an influential theory describing investors’ attitudes toward risk, to explain the effects of the unprecedented retail investor engagement and market performance in recent times. We find that prospect theory value (PTV) has strong predictive power for returns during retail trading booms, and this predictability is stronger for stocks with high investor attention and less subject to arbitrage forces. The retail wave during the COVID-19 pandemic propels PTV’s predictive power in a way unseen in other historical crises. The high predictability of returns is attributable to attention-grabbing social media, fintech brokerage, investor sentiment, and government stimulus policy.

KW - Prospect theory

KW - probability weighting

KW - COVID-19 pandemic

KW - retail trading

KW - volatility

U2 - 10.1016/j.jempfin.2026.101706

DO - 10.1016/j.jempfin.2026.101706

M3 - RGC 21 - Publication in refereed journal

SN - 0927-5398

JO - Journal of Empirical Finance

JF - Journal of Empirical Finance

ER -

Prospect Theory and Stock Price Behavior in Retail Trading Booms

Abstract

Funding

Research Keywords

RGC Funding Information

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Projects

GRF: The Portfolio Choice of Mutual Funds

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