Regret in global equity markets

Official URL: https://dx.doi.org/10.1016/j.irfa.2025.104198

This paper investigates the relation between investment regret and the cross-section of equity returns in an international context. We measure the level of regret from investing in a stock as the negative of the difference between the stock's return and the maximum return that could have been achieved by a stock either in the same industry or with a similar market capitalization or book-to-market ratio. We find that the positive relation between regret and future equity returns is stronger for equal-weighted portfolios suggesting that it is more acute for small stocks. Moreover, the regret effect is stronger in emerging markets compared to developed markets. Furthermore, size-based regret is more pronounced compared to industry- or value-based regret. The regret effect is more prevalent in countries characterized by short-term orientation, capital controls and higher limits-to-arbitrage.