Koustav De is a PhD candidate in Finance at Stephen M. Ross School of Business, University of Michigan.
Area of Interest:
Behavioral Finance (investor behavior)
Stephen M. Ross School of Business,
University of Michigan,
R5421,701 Tappan St.
Ann Arbor, MI, 48109
Job Market Paper:
Losers Buy Beta [link]
I empirically show that investors tend to buy higher beta stocks following realized losses. This behavior is observed in institutional as well as individual investors, but is more pronounced among individual investors with lower expertise, who on an average buy a new stock with up to 15% higher beta than that of the old stock they were holding. For an agent with utility consistent with prospect theory, this behavior emerges as the optimal response to her problem of maximizing utility within a mental account. Furthermore, this behavior can aggregate up during market downturns and cause pricing distortions in a direction similar to the beta anomaly. With this insight, I suggest a modification to the betting against beta trading strategy that can improve the Sharpe ratio more than twofold.