Dynamics of Asset Returns Considering Investors' Asymmetric Risk Preferences
This is an interesting paper on the asymmetric response; anchoring, adjustment, and momentum.
Dynamics of Asset Returns Considering Investors’ Asymmetric Risk Preferences: Evidences from Korean Asset Markets by Yun-Yeong Kim and Jinsoo Lee
Abstract
In this paper, we claim the asymmetric response of asset returns on the past asset returns’ signs may be explained from the market behavioral or psychological portfolio choice of investors. For this, we admit the anchor and adjustment mechanism of investors which partly explains the momentum in the asset prices. We also claim a ‘weak form’ of the disposition effect based on the risk aversions may simultaneously work with the anchor and adjustment effect, whenever the lagged asset return was positive and investors accrued the gain. To check these effects empirically in a threshold autorregressive model, we suppose the risk aversion inducing the weak disposition effect is related with the past volatility of asset returns. In application of suggested method to Korean stock and real estate markets, we found these effect may exist as expected.
*The bold highlights are mine.
Source: http://www.apjfs.org/2009/cafm2009/12_03_Dynamics%20of%20Asset%20Returns.pdf
