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Anchoring effect, prospect value and stock return

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  • Chen, Chun
  • He, Fangyi
  • Lin, Lei

Abstract

This paper studies the relation between prospect value and stock return under the anchoring effect. Our findings show that high (low) prospect value stocks are overpriced (underpriced) in the Chinese stock market. However, this negative relation only exists in stocks far from the 52-week high, where the long-short portfolio of prospect value earns a significant risk-adjusted return of 0.95% per month, and disappears near the 52-week high. Furthermore, we find the interaction between the 52-week high and prospect value mainly derives from the loss aversion feature. Our findings keep robust after controlling for the effect of stock fat-tail distribution.

Suggested Citation

  • Chen, Chun & He, Fangyi & Lin, Lei, 2024. "Anchoring effect, prospect value and stock return," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1539-1556.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:1539-1556
    DOI: 10.1016/j.iref.2023.09.008
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    More about this item

    Keywords

    Prospect theory; Anchoring effect; 52-week high; Loss aversion;
    All these keywords.

    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
    • 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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