Characteristics, Affect, and Stock Returns

24 Pages Posted: 24 Jul 2010

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2010

Abstract

Why were the returns of stocks with low book-to-market ratios and high market capitalizations lower, on average, than the returns of stocks with high book-to-market ratios and low market capitalizations? In this paper we pit the characteristics hypothesis against the affect hypothesis. The characteristics hypothesis says that some characteristics, such as low book-to-market ratio and high market capitalization, are associated with high future stock returns in typical investors’ minds. The affect hypothesis says that the names of some companies elicit positive affect which is associated with high future stock returns in typical investors’ minds. We find, through experiments, that the evidence is more consistent with the affect hypothesis than with the characteristics hypothesis.

Keywords: behavioral finance, investor behavior, efficient markets

JEL Classification: G00, G10

Suggested Citation

Statman, Meir, Characteristics, Affect, and Stock Returns (January 22, 2010). Available at SSRN: https://ssrn.com/abstract=1540759 or http://dx.doi.org/10.2139/ssrn.1540759

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

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