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The perception of dependence, investment decisions, and stock prices
Ungeheuer, Michael
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Weber, Martin
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DOI:
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https://doi.org/10.1111/jofi.12993
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URL:
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https://onlinelibrary.wiley.com/doi/abs/10.1111/jo...
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Additional URL:
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https://papers.ssrn.com/sol3/papers.cfm?abstract_i...
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Document Type:
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Article
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Year of publication:
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2021
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The title of a journal, publication series:
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The Journal of Finance
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Volume:
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76
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Issue number:
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2
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Page range:
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797-844
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Place of publication:
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Hoboken, NJ [u.a.]
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Publishing house:
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Wiley
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ISSN:
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0022-1082 , 1540-6261
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Publication language:
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English
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Institution:
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Business School > ABWL u. Bankbetriebslehre (Seniorprofessur) (Weber 2017-)
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Subject:
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330 Economics
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Classification:
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JEL:
C91, G02, G11, G12,
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Keywords (English):
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Asset Pricing, Biased Beliefs, Correlation Neglect, Dependence, Diversification, Investment Decisions
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Abstract:
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We study how investors perceive dependence between stock returns, how this influences investment decisions and stock prices. Our findings suggest that investors understand differences in dependence, but correlation does not properly capture their perception of dependence. In several laboratory experiments, we show that subjects understand dependence in frequent, moderate returns, but do not understand dependence in infrequent, extreme returns. Consistent with a counting heuristic, they diversify more at lower frequencies of comovement, even if correlation increases due to strong positive dependence in extreme returns. Applying our insights from experiments to 1963-2015 US stock returns, we find that there is a robust return premium for stocks with high frequencies of comovement with the market return. Our findings suggest that dependence between stock returns matters for investors and aggregate market outcomes. They also suggest that investors could improve portfolio selection by taking into account biased beliefs about dependence.
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 | Dieser Eintrag ist Teil der Universitätsbibliographie. |
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