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Mental Accounting, Loss Aversion, and Individual Stock Returns

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  • Nicholas Barberis
  • Ming Huang
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    Abstract

    We study equilibrium firm-level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: in that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross-section which can, to some extent, be captured by a commonly used multifactor model.

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    File URL: http://www.nber.org/papers/w8190.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8190.

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    Date of creation: Mar 2001
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    Publication status: published as Barberis, N. and M. Huang. “Mental Accounting, Loss Aversion, and Individual Stock Returns." Journal of Finance 56 (2001): 1247-1292.
    Handle: RePEc:nbr:nberwo:8190

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