Aggregate Idiosyncratic Volatility, Dynamic Aspects of Loss Aversion, and Narrow Framing
We test the dynamic aspects of the loss aversion feature of Kahneman and Tversky (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 (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 (VAR) confirms the causality of unrealized gains of stock returns on idiosyncratic volatility.
Finance and General Business
loss aversion, narrow framing
Hur, Jungshik, and Cedric Mbanga Luma. "Aggregate idiosyncratic volatility, dynamic aspects of loss aversion, and narrow framing." Review of Quantitative Finance and Accounting 49, no. 2 (2017): 407-433.
Review of Quantitative Finance and Accounting