The influence of affect on stock price volatility: new theory and evidence

Robert A. Olsen

Qualitative Research in Financial Markets, 2012, vol. 4, issue 1, 26-35

Abstract: Purpose - The purpose of this paper is to present a behavioral explanation of excess stock price volatility relative to present value theory. Design/methodology/approach - The conceptual basis is the impact of affect on investor decisions. The empirical tests involve survey data collected from a sample of semi‐professional investors (AAII members) and investment advisors (CFPs). Findings - It is suggested that affect causes investors to perceive an inverseex anterelationship between risk perceptions and expected returns. Thus, new good or bad information has an amplified effect on stock valuations. In addition, investors tend to extrapolate recent short‐term market movements into the future. Practical implications - The primary implications are thatex anteperceptions of risk and return vary inversely and that affect has a strong influence on valuation. This means that simple statistical measures of risk are unlikely to fully capture risk perceptions and that market volatility can be expected to be greater than a simple present value model would imply. Originality/value - This paper is unique as to the conclusion that risk and return perceptions vary inverselyex anteand that affect can amplify stock price volatility.

Keywords: Stock prices; Stock returns; Net present value; Financial management; Affect; Volatility; Risk (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:qrfmpp:v:4:y:2012:i:1:p:26-35

DOI: 10.1108/17554171211213531

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