Anticipated Regret and Equity Returns

83 Pages Posted: 19 Jun 2018 Last revised: 13 Jan 2020

See all articles by Yakup Eser Arısoy

Yakup Eser Arısoy

NEOMA Business School

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Yi Tang

Fordham University - Gabelli School of Business

Date Written: June 1, 2019

Abstract

We investigate the cross-sectional asset pricing implications of anticipated regret for mean-variance investors. We propose a theoretical framework in which mean-variance investors anticipate regret due to deviations from the best possible return-volatility combination. We show that equity portfolios with low anticipated regret generate 7.6% more annualized alpha than portfolios with high anticipated regret. The anticipated regret premium is not fully explained by costly arbitrage, investor inattention, or prospect theory. We further decompose anticipated regret into two components, return-regret and variance-regret, and show that both components play a significant role in mean-variance investors' financial decision making under anticipated regret.

Keywords: regret theory, mean-variance investors, cross-section of stock returns

JEL Classification: G11, G12, G41

Suggested Citation

Arısoy, Yakup Eser and Bali, Turan G. and Tang, Yi, Anticipated Regret and Equity Returns (June 1, 2019). Georgetown McDonough School of Business Research Paper No. 3195191; Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC. Available at SSRN: https://ssrn.com/abstract=3195191 or http://dx.doi.org/10.2139/ssrn.3195191

Yakup Eser Arısoy (Contact Author)

NEOMA Business School ( email )

59 rue Pierre Taittinger
Reims, 51100
France

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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