Risk Revisited

39 Pages Posted: 14 May 2024 Last revised: 15 Jun 2024

See all articles by Xindi He

Xindi He

Georgia Institute of Technology - Scheller College of Business

Yucheng Liang

Carnegie Mellon University - David A. Tepper School of Business

Date Written: March 13, 2024

Abstract

This study explores how the historical price path of a stock shapes investors' perceptions of risk. In a series of experiments, we present participants with real and fabricated stock price charts and elicit both incentivized and unincentivized measures of their risk perceptions. We document that a parsimonious set of three conceptually independent features, i.e., recency, cluster, and sign, can explain large proportions of the variation in risk perceptions. We find that rational inferences about the return data-generating process cannot fully explain the effect and that perceptions both related and unrelated to subjective standard deviation of returns are affected in a consistent way. Using real stock market data in the U.S., we show that these three features help explain cross-sectional variations in returns, and predict trading volume and future volatility.

Keywords: Risk perception, stock market, experiment, recency, cluster, sign

JEL Classification: C90, G40, D80

Suggested Citation

He, Xindi and Liang, Yucheng, Risk Revisited (March 13, 2024). Available at SSRN: https://ssrn.com/abstract=4825844 or http://dx.doi.org/10.2139/ssrn.4825844

Xindi He (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://www.hexindi.com/

Yucheng Liang

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://yuchengliang.com

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