Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households

69 Pages Posted: 12 Aug 2020 Last revised: 29 Nov 2021

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

A. Doruk Gunaydin

Sabanci University

Thomas Jansson

Sveriges Riksbank - Research Division

Yigitcan Karabulut

Frankfurt School of Finance & Management; CEPR

Date Written: July 31, 2020

Abstract

Contrary to the theoretical principle that higher risk is compensated with higher expected return, the literature shows that low-risk stocks outperform high-risk stocks. Using a large-scale household dataset, we provide an explanation for this puzzling result that the anomalous negative risk-return relation is only confined to those stocks held by rich households, whereas the anomaly disappears for stocks held by non-rich households and institutional investors. We find that skewness preference and optimism of rich households as well as their attention to lottery stocks explain wealthy investors' demand for high-risk stocks, leading to overpricing and low future returns for such stocks.

Keywords: low risk anomalies, individual investors, idiosyncratic volatility, lottery stocks, skewness preference, optimism, investor attention

JEL Classification: G10, G11, G12, G14, C13, E20, E30

Suggested Citation

Bali, Turan G. and Gunaydin, A. Doruk and Jansson, Thomas and Karabulut, Yigitcan, Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households (July 31, 2020). Georgetown McDonough School of Business Research Paper No. 3664501, Available at SSRN: https://ssrn.com/abstract=3664501 or http://dx.doi.org/10.2139/ssrn.3664501

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

A. Doruk Gunaydin

Sabanci University ( email )

School of Management
Orhanli Tuzla
İstanbul, 34956
Turkey

Thomas Jansson

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Yigitcan Karabulut

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

CEPR ( email )

London
United Kingdom

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