Abstract

http://ssrn.com/abstract=2070910
 
 

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Reference-Dependent Preferences and the Risk-Return Trade-Off


Huijun Wang


University of Delaware

Jinghua Yan


SAC Capital Advisors; University of Pennsylvania - Wharton Financial Institutions Center

Jianfeng Yu


University of Minnesota

June 16, 2016


Abstract:     
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, whereas 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.

Number of Pages in PDF File: 56

Keywords: Prospect theory, Risk-return trade-off, Risk, Uncertainty, Capital gains overhang

JEL Classification: G02, G12, G14


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Date posted: May 30, 2012 ; Last revised: June 17, 2016

Suggested Citation

Wang, Huijun and Yan, Jinghua and Yu, Jianfeng, Reference-Dependent Preferences and the Risk-Return Trade-Off (June 16, 2016). Available at SSRN: http://ssrn.com/abstract=2070910 or http://dx.doi.org/10.2139/ssrn.2070910

Contact Information

Huijun Wang
University of Delaware ( email )
B & E Finance, UD
306 Purnell Hall
NEWARK, DE Delaware 19716
United States
Jinghua Yan
SAC Capital Advisors ( email )
330 Madison Avenue, 35th Floor
New York, NY 10017
United States
University of Pennsylvania - Wharton Financial Institutions Center ( email )
2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Jianfeng Yu (Contact Author)
University of Minnesota ( email )
321 19th Avenue
Suite 3-122
Minneapolis, MN 55455
United States
HOME PAGE: http://users.cla.umn.edu/~jianfeng/
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