An aspirational perspective on the negative risk-return relationship

Barna Bakó and Gabor Neszveda

Finance Research Letters, 2024, vol. 61, issue C

Abstract: The existence of a negative risk-return relationship challenges the conventional wisdom of finance, which typically assumes a positive correlation between risk and return. Reference-dependent preferences, motivated by prospect theory, offer a possible explanation for this negative risk-return relation. However, as we demonstrate in this paper prospect theory does not provide a general explanation for this puzzle. We show that the expected utility theory with an aspiration level can effectively account for this phenomenon.

Keywords: Negative risk-return; Prospect theory; Expected utility; Aspiration level (search for similar items in EconPapers)
JEL-codes: D81 G12 G41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000072

DOI: 10.1016/j.frl.2024.104977

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