The effect of limited attention and risk attitude on left-tail reversal: Empirical results from a-share data in China

Jun Wang and Xiuna Song

Finance Research Letters, 2022, vol. 46, issue PA

Abstract: This study explores the influence of investors’ attention and risk attitude on the left-tail anomaly. The portfolio analysis method is applied to test the existence of tail-risk reversal and the underlying influential mechanisms. Considering China's price-limit-rule, we propose idiosyncratic volatility-adjusted value-at-risk as a proxy for left-tail risk and encounter significant left-tail reversal. Empirical analysis reveals the reversal is negatively affected by effective attention and positively by risk aversion. Moreover, the joint effect of attention and risk aversion greatly strengthens the reversal. We verify the existence of a tail-risk premium in China and present behavioral factors to explain and enhance it.

Keywords: Left-tail risk; Effective attention; Risk aversion; Adjusted Value-at-Risk (VaR); Reversal effect (search for similar items in EconPapers)
JEL-codes: C30 G41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321001707

DOI: 10.1016/j.frl.2021.102089

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