Low Risk and High Return – Affective Attitudes and Stock Market Expectations

Alexander Kempf, Christoph Merkle and Alexandra Niessen†Ruenzi

European Financial Management, 2014, vol. 20, issue 5, 995-1030

Abstract: This experimental study investigates the impact of affective attitudes on risk and return estimates of stocks. Participants rate well†known blue†chip firms on an affective scale and forecast risk and return of the firms’ stock. We find that positive affective attitudes lead to a prediction of high return and low risk, while negative attitudes lead to a prediction of low return and high risk. This bias increases with participants’ confidence in their ratings and decreases with financial literacy. Firm characteristics such as a firm's marketing expenditures and the strength of its brand have a positive impact on its affective rating.

Date: 2014
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