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The effect of limited attention and risk attitude on left-tail reversal: Empirical results from a-share data in China

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  • Wang, Jun
  • Song, Xiuna

Abstract

This study explores the influence of investors’ attention and risk attitude on the left-tail anomaly. The portfolio analysis method is applied to test the existence of tail-risk reversal and the underlying influential mechanisms. Considering China's price-limit-rule, we propose idiosyncratic volatility-adjusted value-at-risk as a proxy for left-tail risk and encounter significant left-tail reversal. Empirical analysis reveals the reversal is negatively affected by effective attention and positively by risk aversion. Moreover, the joint effect of attention and risk aversion greatly strengthens the reversal. We verify the existence of a tail-risk premium in China and present behavioral factors to explain and enhance it.

Suggested Citation

  • Wang, Jun & Song, Xiuna, 2022. "The effect of limited attention and risk attitude on left-tail reversal: Empirical results from a-share data in China," Finance Research Letters, Elsevier, vol. 46(PA).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321001707
    DOI: 10.1016/j.frl.2021.102089
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    Cited by:

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    2. Wang, Chen & Xiong, Xiong & Shen, Dehua, 2022. "Tail risks, firm characteristics, and stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).

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    More about this item

    Keywords

    Left-tail risk; Effective attention; Risk aversion; Adjusted Value-at-Risk (VaR); Reversal effect;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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