Disruption, Bitcoin, and Prospect Theory

Abstract

We find evidence that investors categorize stocks into a new investment style based on the theme of disruption. We identify disruption style stocks by their extreme return sensitivity to Bitcoin returns during the 2010 to 2019 period. These stocks experience temporary over-valuation and subsequent return reversal that exceeds −1% per month. Additional tests indicate that this trading habitat is dominated by retail clientele. Our evidence suggests that investors evaluate these stocks in a way that is consistent with the probability weighting features of prospect theory.

Keywords: Style investing; Trading habitat; Prospect theory; Retail investors; Cryptocurrency

JEL Classification: G12, G14