The effect of prospect theory value on asset returns on the Borsa Istanbul

The goal of this study is to test the validity of the prospect theory in the Borsa Istanbul (BIST) over the sample period September 2009 to December 2019. The prospect theory values of the stocks are generated from their historical return distributions following the method by Barberis et al. (2016). Panel data analysis is implemented in six different models with market and nonmarket factors for three different data sets of stocks listed on the BIST. We employed control variables, such as Fama and French (2015) five-factor model (FF5M) factors as well as past return and skewness indicators, in the models in addition to the prospect theory value and test whether prospect theory can predict subsequent stock returns. The results show that the prospect theory value has a statistically significant effect on the asset returns and its impact is seen in particular on small-cap stocks in the Turkish stock market.