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Low risk and high return: Affective attitudes and stock market expectations

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  • Kempf, Alexander
  • Merkle, Christoph
  • Niessen-Ruenzi, Alexandra

Abstract

This experimental study investigates the impact of affective attitudes on risk and return estimates of stocks. Participants rate well-known blue-chip firms on an affective scale and forecast risk and return of the firms' stock. We find that positive affective attitudes lead to a prediction of high return and low risk, while negative attitudes lead to a prediction of low return and high risk. This bias increases with participants' confidence in their ratings and decreases with financial literacy. Firm characteristics such as a firm's marketing expenditures and the strength of its brand have a positive impact on its affective rating.

Suggested Citation

  • Kempf, Alexander & Merkle, Christoph & Niessen-Ruenzi, Alexandra, 2012. "Low risk and high return: Affective attitudes and stock market expectations," CFR Working Papers 09-10 [rev.], University of Cologne, Centre for Financial Research (CFR).
  • Handle: RePEc:zbw:cfrwps:0910r
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    References listed on IDEAS

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    5. Roman Kräussl & Ronald Bosman & Thomas van Galen, 2014. "Emotions-at-Risk: An Experimental Investigation into Emotions, Option Prices and Risk Perception," LSF Research Working Paper Series 14-11, Luxembourg School of Finance, University of Luxembourg.
    6. Mohammad Tariqul Islam Khan & Siow-Hooi Tan, 2019. "Stated Preferences for Firm’s Characteristics and Asset Allocation Decisions," Global Business Review, International Management Institute, vol. 20(4), pages 839-855, August.
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    8. Li, Jinfang, 2022. "The sentiment pricing dynamics with short-term and long-term learning," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    9. Li, Jinfang, 2020. "The momentum and reversal effects of investor sentiment on stock prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    10. Fatih B. GUMUS & Yusuf DAYIOGLU, 2015. "An Analysis on The Socio-Economic and Demographic Factors That Have an Effect on The Risk Taking Preferences of Personal Investors," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 136-147.
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    12. Merkle, Christoph & Weber, Martin, 2014. "Do investors put their money where their mouth is? Stock market expectations and investing behavior," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 372-386.
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    More about this item

    Keywords

    affective attitudes; risk and return expectations; behavioral finance; affect heuristic;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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