Do the rich gamble in the stock market? Low risk anomalies and wealthy households

Turan G. Bali, A. Doruk Gunaydin, Thomas Jansson and Yigitcan Karabulut

Journal of Financial Economics, 2023, vol. 150, issue 2

Abstract: Contrary to the theoretical principle that higher risk is compensated with higher expected return, the literature shows that low-risk stocks outperform high-risk stocks. Using a large-scale household dataset, we provide an explanation for this puzzling result that the anomalous negative risk-return relation is only confined to those stocks predominantly held by rich households, whereas the anomaly disappears for stocks held by non-rich households and institutional investors. We find that social status concern of rich households and the induced lottery preference explain wealthy investors’ demand for high-risk stocks, leading to overpricing and low future returns for such stocks.

Keywords: Low risk anomalies; Individual investors; Idiosyncratic volatility; Lottery stocks; Skewness preference; Social status; Wealthy investors (search for similar items in EconPapers)
JEL-codes: C13 E20 E30 G10 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 (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:150:y:2023:i:2:s0304405x23001551

DOI: 10.1016/j.jfineco.2023.103715

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