Does Probability Weighting Drive Skewness Preferences?

34 Pages Posted: 14 Jul 2017 Last revised: 17 Apr 2018

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Jared DeLisle

Utah State University

Ryan J. Whitby

Utah State University - Huntsman School of Business

Date Written: December 31, 2017

Abstract

We propose a test of Barberis and Huang’s (2008) theory of skewness preferences. The probability weighting feature that is the basis of their theory relies on investors overweighting the probability of tail events. The resulting investor preferences for positive skewness in return distributions will lead to excess demand, contemporaneous price premiums, and negative expected returns. We use the well-documented 52-week high bias as a method to truncate the probability of expected right-tail events. We find evidence supporting the Barberis and Huang theory as the negative return premia associated with positive skewness are driven almost entirely by stocks that are farther away from the their 52-week high .

Keywords: Lotteries, Anchoring, Skewness, Behavioral Finance, Probability Weighting

JEL Classification: G02, G11, G12, G14

Suggested Citation

Blau, Benjamin M. and DeLisle, Jared and Whitby, Ryan J., Does Probability Weighting Drive Skewness Preferences? (December 31, 2017). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018; 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=3002742 or http://dx.doi.org/10.2139/ssrn.3002742

Benjamin M. Blau

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Jared DeLisle (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Ryan J. Whitby

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)

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