I propose and develop a framework for the financial economic analysis of investing with altruistic preferences. A key part of the framework is the precise definition of different forms of impact and, in particular, investor impact. This has several practical implications including that investor impact is not a measurable, rival good but rather a decision-making tool that should be carefully and independently assessed by each investor. I also introduce the concept of total portfolio returns, which capture all effects relevant to an investor's mission including financial, impact, and strategic returns and mission-correlated premia. The adaptability and coherence of this framework makes it suitable for both further research and practical applications.
{"title":"A Framework for Investing with Altruism","authors":"Jonathan Harris","doi":"10.2139/ssrn.3934090","DOIUrl":"https://doi.org/10.2139/ssrn.3934090","url":null,"abstract":"I propose and develop a framework for the financial economic analysis of investing with altruistic preferences. A key part of the framework is the precise definition of different forms of impact and, in particular, investor impact. This has several practical implications including that investor impact is not a measurable, rival good but rather a decision-making tool that should be carefully and independently assessed by each investor. I also introduce the concept of total portfolio returns, which capture all effects relevant to an investor's mission including financial, impact, and strategic returns and mission-correlated premia. The adaptability and coherence of this framework makes it suitable for both further research and practical applications.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76497890","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We extend upon Reeves (2020), who attempts to demonstrate that classical violations of the Law of Demand are in actuality the result of a violation of the ‘ceteris paribus’ assumption. For example, price changes in Giffen goods create a chain reaction from the Giffen good through a substitute and back to the Giffen good. Specifically, a price change in the Giffen good is so large wrt the consumer’s income that it creates an income effect on a substitute good, whose decrease in demand sends a shock to the Giffen good’s demand curve, shifting it out through a change in preferences and, hence, violating ceteris paribus. To understand how preferences change, consider the consumer equilibrium condition, MU(x) = λp. When price increases and income (i.e. λ) is held constant, marginal utility must increase. In order for x to increase with price, marginal utility must increase with consumption, violating the Law of Diminishing Marginal Utility. Hence, the change in price must precipitate a change in preferences because for some values of x preferences comport with the Law of Diminishing Marginal Utility whereas for other values of x preferences do not. In this paper, we respond to the non-technical aspects of Jensen and Nolan (2007) by suggesting that the price and demand changes that they are measuring are likely changes along the supply curve, not an upward sloping demand curve. One possible reason for the purported oversight is that the research explores Giffen effects in (good1 , good2 )-space, which cannot capture shifts in the demand curve, defined in (good1 , price1 )-space.
{"title":"The Inviolable Law of Demand","authors":"Toinu Reeves","doi":"10.2139/ssrn.3930186","DOIUrl":"https://doi.org/10.2139/ssrn.3930186","url":null,"abstract":"We extend upon Reeves (2020), who attempts to demonstrate that classical violations of the Law of Demand are in actuality the result of a violation of the ‘ceteris paribus’ assumption. For example, price changes in Giffen goods create a chain reaction from the Giffen good through a substitute and back to the Giffen good. Specifically, a price change in the Giffen good is so large wrt the consumer’s income that it creates an income effect on a substitute good, whose decrease in demand sends a shock to the Giffen good’s demand curve, shifting it out through a change in preferences and, hence, violating ceteris paribus. To understand how preferences change, consider the consumer equilibrium condition, MU(x) = λp. When price increases and income (i.e. λ) is held constant, marginal utility must increase. In order for x to increase with price, marginal utility must increase with consumption, violating the Law of Diminishing Marginal Utility. Hence, the change in price must precipitate a change in preferences because for some values of x preferences comport with the Law of Diminishing Marginal Utility whereas for other values of x preferences do not. In this paper, we respond to the non-technical aspects of Jensen and Nolan (2007) by suggesting that the price and demand changes that they are measuring are likely changes along the supply curve, not an upward sloping demand curve. One possible reason for the purported oversight is that the research explores Giffen effects in (good1 , good2 )-space, which cannot capture shifts in the demand curve, defined in (good1 , price1 )-space.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"49 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74656146","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Market participants acquire different types of information from many sources to inform their trading decisions. This paper uses structural estimation to quantify the amounts of two types of information that the market has: fundamental information – about firm value – and misreporting incentives information –about managers’ incentives to manage earnings. I further measure accounting quality and price efficiency that result from the market’s information endowment. I find that, before the manager’s report is released, the market knows 19.5% of fundamental and 36.6% of misreporting incentives information available to the manager. In equilibrium, accounting quality increases in the market’s fraction of fundamental information and decreases in the market’s fraction of misreporting incentives information, while price efficiency increases with both information types. The elasticity of accounting quality (price efficiency)with respect to the market’s fundamental information is 0.065 (0.217), and with respect to the market’s misreporting incentives information is -0.154 (0.059). I apply my technique to measure the amount of information that the market learned after the compensation disclosure regulation in 2006 and find that the fraction of misreporting incentives information in the market’s hands increased more than 1.5 times: from 21.8% to 38.1%. As a result, equilibrium accounting quality (price efficiency) decreased by 2.87%(increased by 1.30%).
{"title":"How Much Does the Market Know?","authors":"Irina Maxime Luneva","doi":"10.2139/ssrn.3926288","DOIUrl":"https://doi.org/10.2139/ssrn.3926288","url":null,"abstract":"Market participants acquire different types of information from many sources to inform their trading decisions. This paper uses structural estimation to quantify the amounts of two types of information that the market has: fundamental information – about firm value – and misreporting incentives information –about managers’ incentives to manage earnings. I further measure accounting quality and price efficiency that result from the market’s information endowment. I find that, before the manager’s report is released, the market knows 19.5% of fundamental and 36.6% of misreporting incentives information available to the manager. In equilibrium, accounting quality increases in the market’s fraction of fundamental information and decreases in the market’s fraction of misreporting incentives information, while price efficiency increases with both information types. The elasticity of accounting quality (price efficiency)with respect to the market’s fundamental information is 0.065 (0.217), and with respect to the market’s misreporting incentives information is -0.154 (0.059). I apply my technique to measure the amount of information that the market learned after the compensation disclosure regulation in 2006 and find that the fraction of misreporting incentives information in the market’s hands increased more than 1.5 times: from 21.8% to 38.1%. As a result, equilibrium accounting quality (price efficiency) decreased by 2.87%(increased by 1.30%).","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"73 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78152086","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Closing auctions set daily closing prices for U.S. stocks and account for a striking 7.5% of daily volume in 2018, up from 3.1% in 2010. We study the causes and implications of this major trend. Difference-in-difference analyses suggest that closing volume is fueled directly and indirectly by the growth of indexing and ETFs. Auctions usually match large volume cheaply. However, we identify several concerns. The auction price almost never settles within the bid-ask spread, mostly due to the binding tick size. Auction price deviations revert quickly and completely. Finally, as trading migrates to the close, liquidity at the open worsens.
{"title":"Who Trades at the Close? Implications for Price Discovery and Liquidity","authors":"Vincent Bogousslavsky, Dmitriy Muravyev","doi":"10.2139/ssrn.3485840","DOIUrl":"https://doi.org/10.2139/ssrn.3485840","url":null,"abstract":"Closing auctions set daily closing prices for U.S. stocks and account for a striking 7.5% of daily volume in 2018, up from 3.1% in 2010. We study the causes and implications of this major trend. Difference-in-difference analyses suggest that closing volume is fueled directly and indirectly by the growth of indexing and ETFs. Auctions usually match large volume cheaply. However, we identify several concerns. The auction price almost never settles within the bid-ask spread, mostly due to the binding tick size. Auction price deviations revert quickly and completely. Finally, as trading migrates to the close, liquidity at the open worsens.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"18 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78246609","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper theoretically synthesizes the neo-institutionalist, neo-physiocrat, and neo-classical frameworks and helps empirically explain the development of ancient city-states. I first develop a model that clarifies the causal effects of geography and trade on production, appropriation, and defense. I then examine a major implication of trade, that potential crop diversity is important for all outcomes, amongst the ancient Greek city-states. An exploratory analysis suggests the magnitude of the gains from trade is fundamental for explaining economic, military, and political development. Non-parametric tests confirm that comparative-advantage variables are statistically significant and not the abundance of `key crops'.
{"title":"Trade and the Rise of Ancient Greek City-States","authors":"J. Adamson","doi":"10.2139/ssrn.3917397","DOIUrl":"https://doi.org/10.2139/ssrn.3917397","url":null,"abstract":"This paper theoretically synthesizes the neo-institutionalist, neo-physiocrat, and neo-classical frameworks and helps empirically explain the development of ancient city-states. I first develop a model that clarifies the causal effects of geography and trade on production, appropriation, and defense. I then examine a major implication of trade, that potential crop diversity is important for all outcomes, amongst the ancient Greek city-states. An exploratory analysis suggests the magnitude of the gains from trade is fundamental for explaining economic, military, and political development. Non-parametric tests confirm that comparative-advantage variables are statistically significant and not the abundance of `key crops'.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90220808","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This research will look over a dataset which contains 352 observations and 36 variables which is derived from a investment trading simulation where individuals are given information about a select group of companies that they are able to trade on, and are given a timeframe where they can trade which is accelerated, and they have to do their best to be as successful as they can within this time frame. This analysis will look over multiple variables and the affect that they have on each individual’s net performance at the end of the simulation, and the answers that they gave in the end of simulation survey which explains a little bit about how they went about this simulation and how much information they used when making their investing decisions. Most of this analysis will revolve around the strategy that each of the individuals used throughout the simulation and how the different variables within each strategy affected the net performance when comparing it to overall performance.
{"title":"Trading Simulation Strategy: How Does the Amount of Information Used, and Sentiment Affect a Portfolios Net Performance","authors":"David Cecchi","doi":"10.2139/ssrn.3909538","DOIUrl":"https://doi.org/10.2139/ssrn.3909538","url":null,"abstract":"This research will look over a dataset which contains 352 observations and 36 variables which is derived from a investment trading simulation where individuals are given information about a select group of companies that they are able to trade on, and are given a timeframe where they can trade which is accelerated, and they have to do their best to be as successful as they can within this time frame. This analysis will look over multiple variables and the affect that they have on each individual’s net performance at the end of the simulation, and the answers that they gave in the end of simulation survey which explains a little bit about how they went about this simulation and how much information they used when making their investing decisions. Most of this analysis will revolve around the strategy that each of the individuals used throughout the simulation and how the different variables within each strategy affected the net performance when comparing it to overall performance.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"8 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72929170","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study audit quality and investment efficiency when information produced by a third party, e.g., a financial analyst, can curb overvaluation, and auditors are subject to legal liability following audit failure. With the auditor's damage payment based on the price inflation caused by audit failure, the analyst's information brings prices closer to fundamentals and provides a hedge to the auditor against legal liability risk. This weakens incentives for audit quality, and the analyst responds with more information production due to the penalty for mispricing. Consequently, in equilibrium, stricter legal liability leads to higher audit quality, which reduces overinvestment, but also less information production, which increases underinvestment. Thus, stricter legal liability has a non-monotonic effect on firm value: it increases the value of high growth firms, but reduces the value of low growth firms. The results have implications for the optimal level of legal liability that maximizes the expected value of the firm.
{"title":"Audit Quality and Investment Efficiency with Endogenous Information in Markets","authors":"Nisan Langberg, Naomi R. Rothenberg","doi":"10.2139/ssrn.3224561","DOIUrl":"https://doi.org/10.2139/ssrn.3224561","url":null,"abstract":"We study audit quality and investment efficiency when information produced by a third party, e.g., a financial analyst, can curb overvaluation, and auditors are subject to legal liability following audit failure. With the auditor's damage payment based on the price inflation caused by audit failure, the analyst's information brings prices closer to fundamentals and provides a hedge to the auditor against legal liability risk. This weakens incentives for audit quality, and the analyst responds with more information production due to the penalty for mispricing. Consequently, in equilibrium, stricter legal liability leads to higher audit quality, which reduces overinvestment, but also less information production, which increases underinvestment. Thus, stricter legal liability has a non-monotonic effect on firm value: it increases the value of high growth firms, but reduces the value of low growth firms. The results have implications for the optimal level of legal liability that maximizes the expected value of the firm.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"36 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78044576","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We exploit textual analysis tools and study the effects of information overload—an excess level of information faced by decision-makers—on future stock market returns using daily data from the New York Times over eight decades. Information overload increases information and estimation risk, reduces the decision accuracy amid investors’ limited attention and in- formation processing capabilities. Controlling for well-known predictors of returns, we find that excessive information leads higher future excess returns and lower trading volume. The predictive power of information overload over returns is persistent and reverses in about two years. Finally, information overload affects the cross-section of stock returns via a demand shock or limits to arbitrage. Investors require higher risk premia to hold small, high beta, high volatile, and unprofitable stocks.
{"title":"Effects of Information Overload on Financial Market Returns: How Much Is Too Much?","authors":"A. Bernales, Marcela Valenzuela, Ilknur Zer","doi":"10.2139/ssrn.3904916","DOIUrl":"https://doi.org/10.2139/ssrn.3904916","url":null,"abstract":"We exploit textual analysis tools and study the effects of information overload—an excess level of information faced by decision-makers—on future stock market returns using daily data from the New York Times over eight decades. Information overload increases information and estimation risk, reduces the decision accuracy amid investors’ limited attention and in- formation processing capabilities. Controlling for well-known predictors of returns, we find that excessive information leads higher future excess returns and lower trading volume. The predictive power of information overload over returns is persistent and reverses in about two years. Finally, information overload affects the cross-section of stock returns via a demand shock or limits to arbitrage. Investors require higher risk premia to hold small, high beta, high volatile, and unprofitable stocks.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"108 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84668005","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The limits of arbitrage explain how a speculative bubble is sustained; they do not explain how likely one is to occur. To do that, you need a theory about the thing that sporadically causes arbitrageur constraints to bind. I propose a first such theory, which is based on social interactions between speculators. The theory says that bubbles should be more likely in assets where increases in past returns make excited-speculators relatively more persuasive to their peers. I empirically verify this ex ante prediction about bubble likelihoods and show that it is robust to some ex post disagreement about bubble definitions. This paper was accepted by Victoria Ivashina, finance.
{"title":"The Ex Ante Likelihood Of Bubbles","authors":"Alex Chinco","doi":"10.2139/ssrn.3518021","DOIUrl":"https://doi.org/10.2139/ssrn.3518021","url":null,"abstract":"The limits of arbitrage explain how a speculative bubble is sustained; they do not explain how likely one is to occur. To do that, you need a theory about the thing that sporadically causes arbitrageur constraints to bind. I propose a first such theory, which is based on social interactions between speculators. The theory says that bubbles should be more likely in assets where increases in past returns make excited-speculators relatively more persuasive to their peers. I empirically verify this ex ante prediction about bubble likelihoods and show that it is robust to some ex post disagreement about bubble definitions. This paper was accepted by Victoria Ivashina, finance.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83844266","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.
{"title":"Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets","authors":"Snehal Banerjee, Jesse Davis, Naveen Gondhi","doi":"10.2139/ssrn.3335257","DOIUrl":"https://doi.org/10.2139/ssrn.3335257","url":null,"abstract":"The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"143 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78230492","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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