The effect of behavioral factors based on prospect theory on the explanatory power of Fama and French five-factor model

Identifying the factors affecting stock returns has become very important in recent years. Therefore, the purpose of this study is to investigate the effect of two behavioral factors of peak and end based on prospect theory on the explanatory power of Fama and French three-factor and five-factor models. The statistical population of the present study is the companies listed on the Tehran Stock Exchange during the years 2006 to 2020. In this study, multivariate regression method has been used to analyze the data. The results show that the five-factor model of Fama and French has more explanatory power than the three-factor model, in other words, adding two factors of profitability and investment to the three-factor model increases its explanatory power. Findings also indicate that peak and end behavioral factors have very little effect on increasing the three-factor and five-factor models of Fama and French. In other words, the addition of peak and end factors to the two three-factor models and the five-factor Fama and French models does not increase the explanatory power of these models. Although the results show that the peak power is slightly higher than the end, they have little effect on the models as a whole.