Does risk seeking drive stock prices? A stochastic dominance analysis of aggregate investor preferences and beliefs

Thierry Post, Haim Levy

Research output: Contribution to journalReview article

55 Citations (Scopus)

Abstract

We use various stochastic dominance criteria that account for (local) risk seeking to analyze market portfolio efficiency relative to benchmark portfolios formed on market capitalization, book-to-market equity ratio and price momentum. Our results suggest that reverse S-shaped utility functions with risk aversion for losses and risk seeking for gains can explain stock returns. The results are also consistent with a reverse S-shaped pattern of subjective probability transformation. The low average yield on big caps, growth stocks, and past losers may reflect investors' twin desire for downside protection in bear markets and upside potential in bull markets.

Original languageEnglish
Pages (from-to)925-953
Number of pages29
JournalReview of Financial Studies
Volume18
Issue number3
DOIs
Publication statusPublished - Sep 2005
Externally publishedYes

Fingerprint

Stock prices
Dominance analysis
Investors
Risk seeking
Stochastic dominance
Bear market
Stock returns
Market portfolio
Equity
Book-to-market
Risk aversion
Market capitalization
Growth stocks
Utility function
Price momentum
Subjective probability
Benchmark portfolio
Bull market
Portfolio efficiency

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Does risk seeking drive stock prices? A stochastic dominance analysis of aggregate investor preferences and beliefs. / Post, Thierry; Levy, Haim.

In: Review of Financial Studies, Vol. 18, No. 3, 09.2005, p. 925-953.

Research output: Contribution to journalReview article

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