TY - JOUR
T1 - Reference-dependent preferences and the risk–return trade-off
AU - Wang, Huijun
AU - Yan, Jinghua
AU - Yu, Jianfeng
PY - 2017/2/1
Y1 - 2017/2/1
N2 - This paper studies the cross-sectional risk–return trade-off in the stock market. A fundamental principle in finance is the positive relation between risk and expected return. However, recent empirical evidence suggests the opposite. Using several intuitive risk measures, we show that the negative risk–return relation is much more pronounced among firms in which investors face prior losses, but the risk–return relation is positive among firms in which investors face prior gains. We consider a number of possible explanations for this new empirical finding and conclude that reference-dependent preference is the most promising explanation.
AB - This paper studies the cross-sectional risk–return trade-off in the stock market. A fundamental principle in finance is the positive relation between risk and expected return. However, recent empirical evidence suggests the opposite. Using several intuitive risk measures, we show that the negative risk–return relation is much more pronounced among firms in which investors face prior losses, but the risk–return relation is positive among firms in which investors face prior gains. We consider a number of possible explanations for this new empirical finding and conclude that reference-dependent preference is the most promising explanation.
KW - Capital gains overhang
KW - Prospect theory
KW - Risk
KW - Risk–return trade-off
KW - Uncertainty
UR - http://www.scopus.com/inward/record.url?scp=85006051788&partnerID=8YFLogxK
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U2 - 10.1016/j.jfineco.2016.09.010
DO - 10.1016/j.jfineco.2016.09.010
M3 - Article
AN - SCOPUS:85006051788
SN - 0304-405X
VL - 123
SP - 395
EP - 414
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -