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Evaluation periods and asset prices: Myopic loss aversion at the financial marketplace

  • Kliger, Doron
  • Levit, Boris

Examining myopic loss aversion (MLA [Benartzi, S., Thaler, R., 1995. Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics 110, 73-92]) in real financial markets has several merits: in repeated situations investors may learn from each other, aggregate market prices may eliminate individual violations of expected utility, and individuals may decide differently in real situations than in laboratories. We utilize a special feature at the Tel Aviv stock exchange (TASE): occasional shifts of securities from daily to weekly trading. If investors' decisions are influenced by trading frequency manipulation, then returns should be predictably affected. MLA results in a negative relation between risk aversion and the length of the evaluation period. Thus, the longer the evaluation period is, the lower the expected return is. This intuition also suggests reduced sensitivity to economic events in longer evaluation periods. We find strong support for MLA in the marketplace when testing expected return, as well as return sensitivity.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 71 (2009)
Issue (Month): 2 (August)
Pages: 361-371

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Handle: RePEc:eee:jeborg:v:71:y:2009:i:2:p:361-371
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Yakov Amihud & Haim Mendelson & Beni Lauterbach, 1997. "Market Microstructure and Securities Values: Evidence from the Tel Aviv Stock Exchange," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-004, New York University, Leonard N. Stern School of Business-.
  2. Gneezy, U. & Kapteyn, A. & Potters, J.J.M., 2002. "Evaluation Periods and Asset Prices in a Market Experiment," Discussion Paper 2002-8, Tilburg University, Center for Economic Research.
  3. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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  8. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  9. Avner Kalay & Li Wei & Avi Wohl, 2002. "Continuous Trading or Call Auctions: Revealed Preferences of Investors at the Tel Aviv Stock Exchange," Journal of Finance, American Finance Association, vol. 57(1), pages 523-542, 02.
  10. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  11. Thaler, Richard H, et al, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 647-61, May.
  12. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
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