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Myopic Loss Aversion and the Cross-Section of U.S. Stock Returns: Empirical Evidence

We empirically analyze the contribution of myopic loss aversion towards explaining the cross-section of U.S. stock returns. We indeed find that the ostensibly anomalous stock returns for different portfolios, ranging from the 25 Fama-French test assets to portfolios formed on size, momentum or value and combinations thereof, seem to be in equilibrium under the prospect-theoretical metric suggested by Benartzi and Thaler (1995). Furthermore, risk as perceived by a loss-averse investor who is subject to myopic loss aversion is a priced factor in a large cross-section of stocks.