Prospect theory and corporate bond returns : An empirical study

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Pages (from-to)25-48
Journal / PublicationJournal of Empirical Finance
Volume47
Online published5 Mar 2018
Publication statusPublished - Jun 2018

Abstract

Since the 1980s, prospect theory has been considered as the most successful descriptive theory for decision making. In this paper, we examine the predictive power of prospect theory in the U.S. corporate bond market. The empirical evidence shows that prospect theory has significant predictive power for corporate bond returns, especially for junk bond returns. Unlike the findings for the stock market, the loss aversion component plays the most important role in predicting corporate bond returns. The probability weighting component also plays a predictive role for junk bonds, but not for investment-grade bonds.

Research Area(s)

  • Bond return, Loss aversion, Probability weighting, Prospect theory