Popularity and Asset Pricing

Abstract

Less-popular securities have lower prices but higher expected returns. In the efficient market framework, this is usually a risk that is disliked. Behavior finance posits numerous investor biases (e.g., affect) under which prices are determined by emotional sentiment. Popularity unifies both approaches by pricing security characteristics according to how much they are rationally or irrationally (emotionally) liked. Characteristics that are relatively permanently disliked result in pricing discounts and return premiums. A linear, popularity-based pricing equation is suggested.

TOPICS: Security analysis and valuation, portfolio theory