Regret-based capital asset pricing model

Jie Qin

Journal of Banking & Finance, 2020, vol. 114, issue C

Abstract: This study examines the influence of regret aversion on asset pricing by proposing a regret-based capital asset pricing model in which individuals maximize the expected returns from chosen portfolios of assets while minimizing anticipated regrets. In equilibrium, a closed-form pricing formula is derived, whereby a risky asset's excess return is proportional to its “regret beta” that measures the exposure to investors’ emotions. The market as a whole pays investors a positive “regret premium” as compensation for regret aversion. As such, this study proposes a conceptual framework to understand the aggregate effects of regret. The model indicates that employing a regret-related beta can help explain cross-sectional returns. It also implies that regret aversion is a possible reason for the flat security market line and high equity premium.

Keywords: Regret aversion; Anticipated regret; Regret theory; Regret beta; Counterfactual thinking; Emotion (search for similar items in EconPapers)
JEL-codes: D91 G41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300522

DOI: 10.1016/j.jbankfin.2020.105784

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