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
Date Written: July 31, 2020
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
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