Aggregate idiosyncratic volatility, dynamic aspects of loss aversion, and narrow framing

Jungshik Hur () and Cedric Mbanga Luma ()
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Jungshik Hur: Louisiana Tech University
Cedric Mbanga Luma: University of Mississippi

Review of Quantitative Finance and Accounting, 2017, vol. 49, issue 2, No 5, 407-433

Abstract: Abstract We test the dynamic aspects of the loss aversion feature of Kahneman and Tversky (Prospect theory: an analysis of decision under risk. Econometrica 47:263–291, 1979) and find that idiosyncratic volatility is negatively associated with unrealized gains of stock returns. Moreover, we show that this negative relationship is stronger for stocks with high individual investors’ holdings. Finally, we show that controlling for firm age as defined by Fink et al. (What drove the increase in idiosyncratic volatility during the internet boom? J Financ Quant Anal 45:1253–1278, 2010) eliminates the significance of retail trading proportions as a driver of idiosyncratic volatility. These findings are robust to price, sentiment, and IPO dates. Bivariate vector auto-regression confirms the causality of unrealized gains of stock returns on idiosyncratic volatility.

Keywords: Aggregate idiosyncratic volatility; Loss aversion; Investor sentiments (search for similar items in EconPapers)
JEL-codes: G12 G14 G20 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-016-0595-8

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