Safety first, loss probability, and the cross section of expected stock returns

Ji Cao, Marc Oliver Rieger and Lei Zhao

Journal of Economic Behavior & Organization, 2023, vol. 211, issue C, 345-369

Abstract: Recent studies show that loss probability (LP) is a decisive factor when people evaluate assets in laboratory experiments, suggesting a positive relationship between LP and expected stock returns. This corresponds to the classical “Safety-First” principle. We find strong empirical support for this prediction in the U.S. stock market. During our sample period, average risk-adjusted return differences between stocks in the two extreme LP deciles exceed 0.57% per month. The positive LP effect, characterized by the intention of some investors to pay low prices for high LP stocks, remains significant after controlling for traditional downside risk measures.

Keywords: Loss probability; Mental accounting; Risk attitudes; Safety-First; Stock returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:211:y:2023:i:c:p:345-369

DOI: 10.1016/j.jebo.2023.04.022

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