An aspirational perspective on the negative risk-return relationship

Bakó, Barna ORCID: https://orcid.org/0000-0003-3856-0129 and Neszveda, Gábor (2024) An aspirational perspective on the negative risk-return relationship. Finance Research Letters, 61 . DOI 10.1016/j.frl.2024.104977

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Official URL: https://doi.org/10.1016/j.frl.2024.104977

Abstract

The existence of a negative risk-return relationship challenges the conventional wisdom of finance, which typically assumes a positive correlation between risk and return. Referencedependent preferences, motivated by prospect theory, offer a possible explanation for this negative risk-return relation. However, as we demonstrate in this paper prospect theory does not provide a general explanation for this puzzle. We show that the expected utility theory with an aspiration level can effectively account for this phenomenon.

Item Type:

Article

Uncontrolled Keywords:

Negative risk-return ; Prospect theory ; Expected utility ; Aspiration level

JEL classification:

D81 - Information, Knowledge, and Uncertainty: Criteria for Decision-Making under Risk and Uncertainty
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
G41 - Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

Divisions:

Institute of Economics

Subjects:

Finance

Funders:

Bolyai János Research Fellowship and from the National Research, Development, and Innovation Office

Projects:

FK–132343 and K-143276

DOI:

10.1016/j.frl.2024.104977

ID Code:

10984