Low Risk and High Return – Affective Attitudes and Stock Market Expectations
Published in European Financial Management, 2014
Recommended citation: Kempf, Alexander, Christoph Merkle and Alexandra Niessen-Ruenzi. (2011). "Low Risk and High Return – Affective Attitudes and Stock Market Expectations." European Financial Management. 20(5), 995-1030.
This experimental study investigates the impact of affective attitudes on risk and return estimates of stocks. Participants rate well-known blue-chip firms on an affective scale and forecast risk and return of the firms’ stock. We find that positive affective attitudes lead to a prediction of high return and low risk, while negative attitudes lead to a prediction of low return and high risk. This bias increases with participants’ confidence in their ratings and decreases with financial literacy. Firm characteristics such as a firm’s marketing expenditures and the strength of its brand have a positive impact on its affective rating.
JEL codes: D80, G02, G11.
Keywords: Affective attitudes, Risk and return expectations, Behavioural finance, Affect heuristic.