The Perception of Dependence, Investment Decisions, and Stock Prices

Michael Ungeheuer, Martin Weber

Research output: Contribution to journalArticleScientificpeer-review

1 Citation (Scopus)


How do investors perceive dependence between stock returns; and how does their perception of dependence affect investments and stock prices? We show experimentally that investors understand differences in dependence, but not in terms of correlation. Participants invest as if applying a simple counting heuristic for the frequency of comovement. They diversify more when the frequency of comovement is lower even if correlation is higher due to dependence in the tails. Building on our experimental findings, we empirically analyze U.S. stock returns. We identify a robust return premium for stocks with high frequencies of comovement with the market return.
Original languageEnglish
Pages (from-to)797-844
Number of pages48
JournalJournal of Finance
Issue number2
Early online date13 Dec 2020
Publication statusPublished - Apr 2021
MoE publication typeA1 Journal article-refereed


  • Diversification
  • Correlation Neglect
  • CAPM


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