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Aggregate idiosyncratic volatility, dynamic aspects of loss aversion, and narrow framing

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  • Jungshik Hur

    (Louisiana Tech University)

  • Cedric Mbanga Luma

    (University of Mississippi)

Abstract

We test the dynamic aspects of the loss aversion feature of Kahneman and Tversky (Prospect theory: an analysis of decision under risk. Econometrica 47:263–291, 1979) and find that idiosyncratic volatility is negatively associated with unrealized gains of stock returns. Moreover, we show that this negative relationship is stronger for stocks with high individual investors’ holdings. Finally, we show that controlling for firm age as defined by Fink et al. (What drove the increase in idiosyncratic volatility during the internet boom? J Financ Quant Anal 45:1253–1278, 2010) eliminates the significance of retail trading proportions as a driver of idiosyncratic volatility. These findings are robust to price, sentiment, and IPO dates. Bivariate vector auto-regression confirms the causality of unrealized gains of stock returns on idiosyncratic volatility.

Suggested Citation

  • Jungshik Hur & Cedric Mbanga Luma, 2017. "Aggregate idiosyncratic volatility, dynamic aspects of loss aversion, and narrow framing," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 407-433, August.
    • Handle: RePEc:kap:rqfnac:v:49:y:2017:i:2:d:10.1007_s11156-016-0595-8
    DOI: 10.1007/s11156-016-0595-8
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    Cited by:

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    2. Mei-Chen Lin, 2020. "When analysts encounter lottery-like stocks: lottery-like stocks and analyst stock recommendations," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 327-353, July.
    3. Bin Liu & Monica Tan & Marie-Anne Cam, 2019. "Reinvestigate the Bid–Ask Bounce Effect and Pricing of Idiosyncratic Volatility: The Case of the Australian Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-23, March.

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    More about this item

    Keywords

    Aggregate idiosyncratic volatility; Loss aversion; Investor sentiments;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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