It Depends Who you Ask: Context Effects in the Perception of Stock Returns

39 Pages Posted: 4 Feb 2021 Last revised: 15 Mar 2021

See all articles by Constantinos Antoniou

Constantinos Antoniou

University of Warwick - Warwick Business School

Junyang Guo

University of Warwick - Warwick Business School

Neil Stewart

University of Warwick - Warwick Business School

Date Written: March 15, 2021

Abstract

We use a large dataset of individual investor stock trades to demonstrate that investors are more likely to sell stocks with larger price changes in the previous day. This is consistent with investors trying to learn about the firms' fundamentals from stock returns. Our core contribution is to show that the same return elicits a much larger selling response when that return is extreme compared to the individual investor's own personal portfolio history of returns. The effect is large. When a return is extreme compared to an investor's personal history of returns, the coefficient on negative returns increases by a factor of 4.5 and the coefficient on positive returns increases by a factor of 2.0. Whereas stock returns are commonly considered to be "objective", here we have demonstrated considerable subjectivity in their perception.

Keywords: investor behavior, context effect, household finance

JEL Classification: G11, G02, D14

Suggested Citation

Antoniou, Constantinos and Guo, Junyang and Stewart, Neil, It Depends Who you Ask: Context Effects in the Perception of Stock Returns (March 15, 2021). Available at SSRN: https://ssrn.com/abstract=3777778 or http://dx.doi.org/10.2139/ssrn.3777778

Constantinos Antoniou

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Junyang Guo (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Neil Stewart

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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