Anchoring effect, prospect value and stock return

This paper studies the relation between prospect value and stock return under the anchoring effect. Our findings show that high (low) prospect value stocks are overpriced (underpriced) in the Chinese stock market. However, this negative relation only exists in stocks far from the 52 week high, where the long-short portfolio of prospect value earns a significant risk-adjusted return of 0.95% per month, and disappears near the 52-week high. Furthermore, we find the interaction between the 52-week high and prospect value mainly derives from the loss aversion feature. Our findings keep robust after controlling for the effect of stock fat-tail distribution.

Automated summary

This paper examines the relationship between prospect value and stock return under the anchoring effect. The findings indicate that high prospect value stocks are overpriced, while low prospect value stocks are underpriced in the Chinese stock market. However, this negative relationship is only observed in stocks far from the 52-week high and disappears near the 52-week high. Additionally, the interaction between the 52-week high and prospect value is mainly driven by the loss aversion feature.