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Mental Accounting, Loss Aversion, and Individual Stock Returns
Author(s) -
Barberis Nicholas,
Huang Ming
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00367
Subject(s) - economics , stock (firearms) , volatility (finance) , loss aversion , portfolio , econometrics , financial economics , mental accounting , value premium , growth stock , capital asset pricing model , monetary economics , stock market bubble , stock market , microeconomics , mechanical engineering , paleontology , horse , engineering , biology
We study equilibrium firm‐level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: In that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross section which can, to some extent, be captured by a commonly used multifactor model.