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Applicability of Prospect Theory for Explanation of Returns on the Russian Stock Market

Student: Ignat Legeza

Supervisor: Victoria V. Dobrynskaya

Faculty: Faculty of Economic Sciences

Educational Programme: Economics (Bachelor)

Year of Graduation: 2017

This paper provides a broad research on application of Prospect Theory to explain stock returns on Russian stock market. Prospect Theory, presented by Kahneman and Tversky, rejects the main assumption of classical financial and economic theory —- individuals’ rationality, and proposes an alternative way of expected utility assessment. This new approach tries to consider all the different biases present in people’s behavior. On practice, applying this theory to financial markets’ research, implies inclusion of additional factors, which may influence expected returns. These factors help to effectively deal with such biases in investors’ behavior as momentum and disposition effects, risk seeking and risk aversion, loss aversion and so on. The main result of the conducted research is the following: biases in behavior of financial markets’ participant can have a significant effect on future stocks returns, which comes into collision with classic economic and financial theories.

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