Beta, value, and growth: Do dichotomous risk-preferences explain stock returns?

Maurizio Montone

Journal of Behavioral and Experimental Finance, 2023, vol. 39, issue C

Abstract: I propose a Capital Asset Pricing Model in which investor demand exhibits a speculative component. In equilibrium, investors’ optimal trade-off between diversification and speculation generates predictable patterns for stocks with extreme book-to-market ratios. Using data on U.S. stocks, I find evidence consistent with the model predictions. I show that the value premium varies with investors’ propensity to speculate, and therefore includes a substantial behavioral component. Overall, the findings shed new light on the role of dichotomous risk-preferences in asset pricing.

Keywords: Value premium; Speculative demand; Beta; Business cycle (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:39:y:2023:i:c:s2214635023000485

DOI: 10.1016/j.jbef.2023.100834

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