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Regret-based capital asset pricing model

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  • Qin, Jie

Abstract

This study examines the influence of regret aversion on asset pricing by proposing a regret-based capital asset pricing model in which individuals maximize the expected returns from chosen portfolios of assets while minimizing anticipated regrets. In equilibrium, a closed-form pricing formula is derived, whereby a risky asset's excess return is proportional to its “regret beta” that measures the exposure to investors’ emotions. The market as a whole pays investors a positive “regret premium” as compensation for regret aversion. As such, this study proposes a conceptual framework to understand the aggregate effects of regret. The model indicates that employing a regret-related beta can help explain cross-sectional returns. It also implies that regret aversion is a possible reason for the flat security market line and high equity premium.

Suggested Citation

  • Qin, Jie, 2020. "Regret-based capital asset pricing model," Journal of Banking & Finance, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300522
    DOI: 10.1016/j.jbankfin.2020.105784
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    References listed on IDEAS

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    Cited by:

    1. Armantier, Olivier & Foncel, Jérôme & Treich, Nicolas, 2023. "Insurance and portfolio decisions: Two sides of the same coin?," Journal of Financial Economics, Elsevier, vol. 148(3), pages 201-219.
    2. Jinesh Jain & Nidhi Walia & Simarjeet Singh & Esha Jain, 2022. "Mapping the field of behavioural biases: a literature review using bibliometric analysis," Management Review Quarterly, Springer, vol. 72(3), pages 823-855, September.
    3. Tai-Yuen Hon & Massoud Moslehpour & Kai-Yin Woo, 2021. "Review on Behavioral Finance with Empirical Evidence," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(4), pages 15-41, December.
    4. Insana, Alessandra, 2023. "Betting against beta with intraday and overnight signals," International Review of Financial Analysis, Elsevier, vol. 86(C).
    5. Bakó, Barna & Neszveda, Gábor, 2020. "The Achilles’ heel of Salience theory and a way to fix it," Economics Letters, Elsevier, vol. 193(C).

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    More about this item

    Keywords

    Regret aversion; Anticipated regret; Regret theory; Regret beta; Counterfactual thinking; Emotion;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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