Regret aversion and asset pricing anomalies in the Chinese stock market

Yajie Wang and Jiayu Yang

International Review of Finance, 2025, vol. 25, issue 1

Abstract: This paper discusses the impact of regret aversion on Chinese stock market returns from the asset pricing perspective. From the intertemporal investment and consumption analytical framework, a representative investor determines the optimal wealth allocation by perceiving the stock's “expected rate of return” and “regret effect” to maximize utility. The simulation results show that the expected returns present a downward convex shape with the change in regret aversion. Using China's A‐share market data, the empirical tests confirm the mechanism and different bull and bear market signals. Our findings reveal regret aversion in the A‐share market, and “market return” is an essential measuring indicator, which improves the consumption‐based Capital Asset Pricing Model (CCAPM) empirical results by more minor pricing errors and equity premiums. Comparatively, the variations in cross‐sectional stock returns during bull markets illustrate the herd behavior prevalent in the Chinese market, and the cross‐sectional data observed in bear markets demonstrate a superior fitting effect.

Date: 2025
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