This study examines the multi-factor models of the prospect theory (PT) in the Chinese stock markets. Based on all A- and B-share stocks from January 2000 to December 2022, it develops a new behavioural asset pricing framework that augments standard factor models with a PT-based component. Our results reveal the following: first, the PT value (PTV) factor has a significant negative correlation with stock returns in the A-share market, whereas it has a non-significant correlation with stock returns in the B-share market. Second, the effect of the PTV factor on stock returns remains significant in the A-share market even after extending the baseline specification by adding additional risk factors and lottery-type controls. Third, economic policy uncertainty is considered a non-traded macro-economic state variable and moderates the relationship between the PTV and stock returns. Finally, the extended behavioural asset pricing specification exhibits greater explanatory power than traditional asset pricing models. This study contributes to the extant literature by providing new evidence on Chinese A- and B-share markets.
Xiao et al. (2026) studied this question.