The w(p) in the financial markets: An empirical approach on the S&P 500

EasyChair Preprint no. 40, version 1

Abstract

The aim of the work is to estimate the probability weighting function, starting from the time series of the S&P 500 index. After an introduction to the Effecient Markets Hypothesis (EMH) and the empirical evidence against it, we have introduced the Prospect Theory (PT). Following the studies carried out by Gonzalez et al.,we have analyzed w(p) and we have proposed a new estimation method with a two parameters function. The OLS (Ordinary Least Squares) method provides the alpha and beta coefficients, which represent respectively the curvature and elevation of the weighting function. In the last part of the paper, w(p) has been implemented in the building of the portfolio with random weights.

Keyphrases: Behavioral Finance, Efficient Market Hypothesis, probability weighting function

@Booklet{EasyChair:40,
  author = {Fabrizio Di Sciorio},
  title = {The w(p)  in the financial markets: An empirical approach on the S&P 500},
  howpublished = {EasyChair Preprint no. 40},
  doi = {10.29007/hslt},
  year = {EasyChair, 2018}}