The Anna Karenina principle and stock prices

Abstract The Anna Karenina principle (AKP) based on the opening line of Leo Tolstoy’s Anna Karenina, “All happy families are all alike; each unhappy family is unhappy in its own way” is applied to financial markets. We test the AKP by defining happy firms as positive return firms and unhappy firms as negative return firms and analyse whether happy firms are more “alike” than unhappy firms. We use return correlations, cross-sectional return and cross-sectional volatility dispersion as measures and find for different stock index constituent samples totalling more than 8000 stocks that the AKP does not hold in general. In contrast, we find that the average return volatility of unhappy firms is larger than that of happy firms. This cross-sectional version of volatility asymmetry also implies that unhappy firms are more stressed than happy firms.