The Effects of Prior Outcomes on Risky Choice: Evidence from the Stock Market

Fenghua Wen, Xu Gong, Youcong Chao and Xiaohong Chen

Mathematical Problems in Engineering, 2014, vol. 2014, 1-8

Abstract:

How do prior outcomes affect the risk choice? Research on this can help people to understand investors’ dynamic decisions in financial market. This paper puts forward a new value function. By analyzing the new value function, we find that the prior gains and losses have an impact on the form of value function and the current investors’ risk attitude. Then the paper takes the behavior of the whole stock market as the research object, adopts aggregative index number of 14 representative stocks around the world as samples, and establishes a TVRA-GARCH-M model to investigate the influences of prior gains and losses on the current risk attitude. The empirical study indicates that, at the whole market level, prior gains increase people’s current willingness to take risk assert; that is to say, the house money effect exists in the market, while people are more risk aversion following prior losses.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:272518

DOI: 10.1155/2014/272518

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