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How loss averse are investors in financial markets?

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  • Hwang, Soosung
  • Satchell, Steve E.

Abstract

We investigate loss aversion in financial markets using a typical asset allocation problem. Our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature. Moreover, loss aversion changes depending on market conditions; investors become far more loss averse during bull markets than during bear markets, indicating their more profound disutility for losses when others enjoy gains. Contrary to most previous results, we find that investors are more sensitive to changes in losses than changes in gains.

Suggested Citation

  • Hwang, Soosung & Satchell, Steve E., 2010. "How loss averse are investors in financial markets?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2425-2438, October.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2425-2438
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    References listed on IDEAS

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    Cited by:

    1. Fortin, Ines & Hlouskova, Jaroslava, 2011. "Optimal asset allocation under linear loss aversion," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2974-2990, November.
    2. Matteo Del Vigna, 2011. "Ambiguity made easier," Working Papers - Mathematical Economics 2011-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    3. Matteo Del Vigna, 2011. "Market equilibrium with heterogeneous behavioural and classical investors' preferences," Working Papers - Mathematical Economics 2011-09, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    4. Bertrand, Philippe & Prigent, Jean-luc, 2011. "Omega performance measure and portfolio insurance," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1811-1823, July.
    5. Valeri Zakamouline, 2014. "Portfolio performance evaluation with loss aversion," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 699-710, April.
    6. Dichtl, Hubert & Drobetz, Wolfgang, 2011. "Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1683-1697, July.
    7. Liu, Shuangzhe & Ma, Tiefeng & Polasek, Wolfgang, 2014. "Spatial system estimators for panel models: A sensitivity and simulation study," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 101(C), pages 78-102.
    8. Matteo Del Vigna, 2011. "Financial market equilibria with heterogeneous agents: CAPM and market segmentation," Working Papers - Mathematical Economics 2011-08, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    9. Jacques Pézier & Johanna Scheller, 2011. "A Comprehensive Evaluation of Portfolio Insurance Strategies," ICMA Centre Discussion Papers in Finance icma-dp2011-15, Henley Business School, Reading University.
    10. Eeckhoudt, Louis & Fiori, Anna Maria & Rosazza Gianin, Emanuela, 2016. "Loss-averse preferences and portfolio choices: An extension," European Journal of Operational Research, Elsevier, vol. 249(1), pages 224-230.
    11. Jaroslava Hlouskova & Panagiotis Tsigaris, 2012. "Capital income taxation and risk taking under prospect theory," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 554-573, August.
    12. Hentati-Kaffel, Rania, 2016. "Structured products under generalized kappa ratio," Economic Modelling, Elsevier, vol. 58(C), pages 599-614.
    13. Pézier, Jacques & Scheller, Johanna, 2013. "Best portfolio insurance for long-term investment strategies in realistic conditions," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 263-274.
    14. Hwang, Soosung & Rubesam, Alexandre, 2013. "A behavioral explanation of the value anomaly based on time-varying return reversals," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2367-2377.
    15. Chen, Zhiping & Yang, Li, 2011. "Nonlinearly weighted convex risk measure and its application," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1777-1793, July.
    16. repec:eee:jbfina:v:88:y:2018:i:c:p:52-62 is not listed on IDEAS
    17. Ines Fortin & Jaroslava Hlouskova, 2015. "Downside loss aversion: Winner or loser?," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 81(2), pages 181-233, April.
    18. Fortin, Ines & Hlouskova, Jaroslava, 2012. "Optimal Asset Allocation under Quadratic Loss Aversion," Economics Series 291, Institute for Advanced Studies.

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