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An aspirational perspective on the negative risk-return relationship

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  • Bakó, Barna
  • Neszveda, Gábor

Abstract

The existence of a negative risk-return relationship challenges the conventional wisdom of finance, which typically assumes a positive correlation between risk and return. Reference-dependent preferences, motivated by prospect theory, offer a possible explanation for this negative risk-return relation. However, as we demonstrate in this paper prospect theory does not provide a general explanation for this puzzle. We show that the expected utility theory with an aspiration level can effectively account for this phenomenon.

Suggested Citation

  • Bakó, Barna & Neszveda, Gábor, 2024. "An aspirational perspective on the negative risk-return relationship," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000072
    DOI: 10.1016/j.frl.2024.104977
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    More about this item

    Keywords

    Negative risk-return; Prospect theory; Expected utility; Aspiration level;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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