Capital gain overhang and risk–return trade-off: An international study

In this article, we examine the risk–return relation under the impact of investors' price reference points in international markets. We calculate capital gain overhang (CGO) to measure the psychological evaluation of past returns. Using a double-sorting methodology, we find that a negative risk–return trade-off generally exists in international markets when CGO is low; results using the Fama–MacBeth procedure confirm our findings. The CGO effect is more prominent in less developed, less transparent, and less legally protected markets. It is stronger in markets with collectivistic, higher power-distanced, and feminine cultures. The evidence also indicates that the price reference effect is more pronounced when the market is in crisis. Finally, the CGO effect on the risk–return relation reverses as the holding period becomes longer.