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What Drives the Regret Premium: Evidence from China

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  • Wang, Shujie
  • Han, Liyan
  • Yang, Xiaoguang
  • Qiao, Tongshuai

Abstract

Although prior studies suggest that investor regret is a salient behavioral force in emerging markets, the factors driving the regret (REG) premium remain underexplored. This paper fills this gap by investigating the underlying drivers within China’s distinctive market and institutional context. Using portfolio sorts and Fama-MacBeth regressions from 1995 to 2024, we find that high-REG stocks earn significantly higher risk-adjusted returns. Further analyses reveal that the REG premium is stronger for non-state-owned enterprises, during periods of high market volatility, in low-information environments, and when investor sentiment is weak. Liquidity improvements, greater market openness, and higher institutional participation substantially attenuate the effect. Robustness checks using alternative benchmarks, extended estimation horizons, and an orthogonalized measure confirm that the REG premium is a robust and persistent market anomaly. Overall, our findings suggest that improvements in the market environment help reduce mispricing, providing broader insights into behavioral asset pricing and financial liberalization in emerging markets.

Suggested Citation

  • Wang, Shujie & Han, Liyan & Yang, Xiaoguang & Qiao, Tongshuai, 2026. "What Drives the Regret Premium: Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:intfin:v:107:y:2026:i:c:s1042443125001672
    DOI: 10.1016/j.intfin.2025.102277
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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