While recently the after-cost profits of many anomalies are close to zero, investing according to the Mean-Variance (MV) criterion has never been so rewarding. The Global Minimum Variance Portfolio is the simplest option for small investors to profitably gain exposure to the market by timing stock covariances. Minimizing over transaction costs restores credibility in the capability of MV strategies to efficiently target risk premia by timing stock risk premia, additionally lowering downside risk and enhancing scalability. More generally, market timing and estimation error are important drivers behind the MV profitability in the U.S. stock market over the last century.
{"title":"Mean-Variance Market Timing the U.S. Stock Market","authors":"Luca Pezzo, Lei Wang, Duygu Zirek","doi":"10.2139/ssrn.3828222","DOIUrl":"https://doi.org/10.2139/ssrn.3828222","url":null,"abstract":"While recently the after-cost profits of many anomalies are close to zero, investing according to the Mean-Variance (MV) criterion has never been so rewarding. The Global Minimum Variance Portfolio is the simplest option for small investors to profitably gain exposure to the market by timing stock covariances. Minimizing over transaction costs restores credibility in the capability of MV strategies to efficiently target risk premia by timing stock risk premia, additionally lowering downside risk and enhancing scalability. More generally, market timing and estimation error are important drivers behind the MV profitability in the U.S. stock market over the last century.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131187666","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}
Using a large survey panel that connects household shopping behavior with individual health information, this paper documents correlations between self reported depression and the size and composition of shopping baskets. First, we find that roughly 16% of individuals report suffering from depression and over 30% of households have at least one member who reports suffering from depression. Households with a member suffering from depression exhibit striking differences in shopping behavior: they spend less overall, visit grocery stores less and convenience stores more frequently and spend a smaller share of their baskets on fresh produce and alcohol but a larger share on tobacco. They spend similar shares on unhealthy foods like cakes, candy, and salty snacks. These cross-sectional correlations hold within counties, suggesting that they are not driven by region specific demographics or preferences that are incidentally correlated with depression status. They also hold when considering only single-member households. However, we rule out large differences in shopping behavior within households as they change depression status throughout the sample. Further, using the take-up of antidepressant drugs as an event, we document little change in shopping in response to treatment. With our results, we discuss the takeaways for health policy, decision modeling and targeted marketing.
{"title":"Depression and Shopping Behavior","authors":"Katherine Meckel, Bradley T. Shapiro","doi":"10.2139/ssrn.3934028","DOIUrl":"https://doi.org/10.2139/ssrn.3934028","url":null,"abstract":"Using a large survey panel that connects household shopping behavior with individual health information, this paper documents correlations between self reported depression and the size and composition of shopping baskets. First, we find that roughly 16% of individuals report suffering from depression and over 30% of households have at least one member who reports suffering from depression. Households with a member suffering from depression exhibit striking differences in shopping behavior: they spend less overall, visit grocery stores less and convenience stores more frequently and spend a smaller share of their baskets on fresh produce and alcohol but a larger share on tobacco. They spend similar shares on unhealthy foods like cakes, candy, and salty snacks. These cross-sectional correlations hold within counties, suggesting that they are not driven by region specific demographics or preferences that are incidentally correlated with depression status. They also hold when considering only single-member households. However, we rule out large differences in shopping behavior within households as they change depression status throughout the sample. Further, using the take-up of antidepressant drugs as an event, we document little change in shopping in response to treatment. With our results, we discuss the takeaways for health policy, decision modeling and targeted marketing.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"197 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122523077","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}
I test the predictions of human memory models in a high-stakes trading environment. Using alphabetical rankings of stocks from portfolio statements, I estimate plausibly random associations of adjacent stocks in an investor’s memory. When two stocks are associated in an investor’s memory, trading one stock cues the recall of the other, and increases the probability that the investor also trades the other stock. Increasing the memory strength of this association by one standard deviation increases the trade probability by 5 percentage points. I then document that personal experience affects trading behavior through the different properties of human memory.
{"title":"Memory and Trading","authors":"C. Charles","doi":"10.2139/ssrn.3759444","DOIUrl":"https://doi.org/10.2139/ssrn.3759444","url":null,"abstract":"I test the predictions of human memory models in a high-stakes trading environment. Using alphabetical rankings of stocks from portfolio statements, I estimate plausibly random associations of adjacent stocks in an investor’s memory. When two stocks are associated in an investor’s memory, trading one stock cues the recall of the other, and increases the probability that the investor also trades the other stock. Increasing the memory strength of this association by one standard deviation increases the trade probability by 5 percentage points. I then document that personal experience affects trading behavior through the different properties of human memory.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"88 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121497408","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 revisit foundational questions in agency theory while assuming that the agent can fine-tune the joint distribution of all contractible and non-contractible performance measures. Under this assumption, optimal contracts behave as if the principal were making inferences about the outcome she values rather than about the agent's action. This has significant implications for what measures are included in contracts and how those measures are used. Most importantly, Holmström's (1979) informativeness principle changes. A performance measure is valuable if it improves inferences not about the agent's action, but about the outcome the principal values; and if that outcome is contractible, additional measures have no value. Our model predicts that contracts should be written only on outcomes that firm owners value, consistent with real-world contracts that tie executive pay to only a handful of accounting, market, or nonfinancial measures.
{"title":"Contracting on What Firm Owners Value","authors":"J. Bonham, Amoray Riggs-Cragun","doi":"10.2139/ssrn.3892838","DOIUrl":"https://doi.org/10.2139/ssrn.3892838","url":null,"abstract":"We revisit foundational questions in agency theory while assuming that the agent can fine-tune the joint distribution of all contractible and non-contractible performance measures. Under this assumption, optimal contracts behave as if the principal were making inferences about the outcome she values rather than about the agent's action. This has significant implications for what measures are included in contracts and how those measures are used. Most importantly, Holmström's (1979) informativeness principle changes. A performance measure is valuable if it improves inferences not about the agent's action, but about the outcome the principal values; and if that outcome is contractible, additional measures have no value. Our model predicts that contracts should be written only on outcomes that firm owners value, consistent with real-world contracts that tie executive pay to only a handful of accounting, market, or nonfinancial measures.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128213310","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}
Collective knowledge is significantly affected by information about others’ viewpoints. However, under what conditions does the “wisdom of crowds” help versus harm knowledge of factual information? In this experiment, we present subjects with the task of answering 50 factual true or false trivia questions, with the potential opportunity to revise their answers after receiving different levels of information about other subjects’ answers and self-assessed confidence levels from an independent session. We find that information about others’ answers improves performance on easy questions, but tends to harm performance on difficult questions. In addition, information about answers provided by other subjects mainly improves performance for those with lower initial knowledge levels. Subjects in our Moderate-Information condition outperform those in either the Low or High-Information conditions, implying an optimal level of social information provision, in which the Majority Rule and Maximum Confidence rule complement one another. Although the Maximum Confidence rule can improve performance, yielding the lowest overall error rate out of the heuristics considered, subjects generally underutilize the information on other subjects’ confidence levels in favor of the Majority Rule heuristic. These findings shed light on possible directions for policies that can cultivate factual knowledge on online opinion platforms.
{"title":"Stuck in the Wisdom of Crowds: Information, Knowledge, and Heuristics","authors":"Yunwen He, J. Lien, Jie Zheng","doi":"10.2139/ssrn.3885337","DOIUrl":"https://doi.org/10.2139/ssrn.3885337","url":null,"abstract":"Collective knowledge is significantly affected by information about others’ viewpoints. However, under what conditions does the “wisdom of crowds” help versus harm knowledge of factual information? In this experiment, we present subjects with the task of answering 50 factual true or false trivia questions, with the potential opportunity to revise their answers after receiving different levels of information about other subjects’ answers and self-assessed confidence levels from an independent session. We find that information about others’ answers improves performance on easy questions, but tends to harm performance on difficult questions. In addition, information about answers provided by other subjects mainly improves performance for those with lower initial knowledge levels. Subjects in our Moderate-Information condition outperform those in either the Low or High-Information conditions, implying an optimal level of social information provision, in which the Majority Rule and Maximum Confidence rule complement one another. Although the Maximum Confidence rule can improve performance, yielding the lowest overall error rate out of the heuristics considered, subjects generally underutilize the information on other subjects’ confidence levels in favor of the Majority Rule heuristic. These findings shed light on possible directions for policies that can cultivate factual knowledge on online opinion platforms.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125259076","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}
As corporate bonds are primarily denominated in nominal terms, inflation uncertainty arises as a relevant source of risk. This paper analyzes the relevance of inflation volatility risk as an additional factor predicting the cross-section of corporate bond returns. I find a negative and significant inflation volatility risk premium (IVRP) obtained from the difference between high inflation and low inflation beta portfolios. Further, common risk factors in the equity and corporate bond markets do not explain the IVRP, it responds to ex-post inflation risk and is partially explained by market risk and monetary policy shocks. Lastly, I show that the IVRP is associated with firms incurring in debt maturity management to mitigate refinancing risks.
{"title":"Inflation Volatility Risk and the Cross-section of Corporate Bond Returns","authors":"L. Ceballos","doi":"10.2139/ssrn.3883556","DOIUrl":"https://doi.org/10.2139/ssrn.3883556","url":null,"abstract":"As corporate bonds are primarily denominated in nominal terms, inflation uncertainty arises as a relevant source of risk. This paper analyzes the relevance of inflation volatility risk as an additional factor predicting the cross-section of corporate bond returns. I find a negative and significant inflation volatility risk premium (IVRP) obtained from the difference between high inflation and low inflation beta portfolios. Further, common risk factors in the equity and corporate bond markets do not explain the IVRP, it responds to ex-post inflation risk and is partially explained by market risk and monetary policy shocks. Lastly, I show that the IVRP is associated with firms incurring in debt maturity management to mitigate refinancing risks.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122768026","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}
Despite extensive evidence of how mutual fund competition affects fund fee and performance outcomes, there is little evidence of how competition affects the incentives of market participants. This paper uses an international sample of active equity mutual funds to examine how product development in mutual fund families is affected by competitive pressure. Fund family product development is defined as improving the quality of existing funds (e.g., level of activity, quality consistency, star funds, and manager changes) or as changes in the fund base (e.g., starting new funds, mergers, and liquidating funds). The results show that greater industry competition motivates fund families to carry out product development through the quality channel rather than the base channel. Furthermore, product quality development increases performance in the family-affiliated funds, and thus benefits the investors. Based on the findings, I argue that competition motivates desired activity in the mutual fund industry and reduces conflicts of interest that stem from the family structure of the industry.
{"title":"Competition and Fund Family Product Development","authors":"Andreas Ørpetveit","doi":"10.2139/ssrn.3883242","DOIUrl":"https://doi.org/10.2139/ssrn.3883242","url":null,"abstract":"Despite extensive evidence of how mutual fund competition affects fund fee and performance outcomes, there is little evidence of how competition affects the incentives of market participants. This paper uses an international sample of active equity mutual funds to examine how product development in mutual fund families is affected by competitive pressure. Fund family product development is defined as improving the quality of existing funds (e.g., level of activity, quality consistency, star funds, and manager changes) or as changes in the fund base (e.g., starting new funds, mergers, and liquidating funds). The results show that greater industry competition motivates fund families to carry out product development through the quality channel rather than the base channel. Furthermore, product quality development increases performance in the family-affiliated funds, and thus benefits the investors. Based on the findings, I argue that competition motivates desired activity in the mutual fund industry and reduces conflicts of interest that stem from the family structure of the industry.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"2015 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125710016","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}
Ignoring the heterogeneity of determinants across sectoral and sub-sectoral FDI begets flawed inferences in the mainstream literature. Significant drivers of FDI inflows vary across sectors and sub-sectors. Using UNCTAD Database of FDI from 2004 o 2018, we run GMM, Fixed Effects, and 3SLS estimations across a global sample of 198 countries and a regional sample of 17 the Middle East and North African (MENA) countries. We select the common determinants of FDI in the literature and re-visit their stylized evidence of significance and magnitude across four main FDI sectors, total, primary, secondary and tertiary, as well as across 29 subsectors. Our results confirm the divergence of the magnitude, sign, and significance of the determinants across sectors and countries’ samples.
{"title":"Determinants of Sectoral and Sub-Sectoral FDI: Evidence from the MENA Region","authors":"Ahmed Badreldin, S. Hassan","doi":"10.2139/ssrn.3882832","DOIUrl":"https://doi.org/10.2139/ssrn.3882832","url":null,"abstract":"Ignoring the heterogeneity of determinants across sectoral and sub-sectoral FDI begets flawed inferences in the mainstream literature. Significant drivers of FDI inflows vary across sectors and sub-sectors. Using UNCTAD Database of FDI from 2004 o 2018, we run GMM, Fixed Effects, and 3SLS estimations across a global sample of 198 countries and a regional sample of 17 the Middle East and North African (MENA) countries. We select the common determinants of FDI in the literature and re-visit their stylized evidence of significance and magnitude across four main FDI sectors, total, primary, secondary and tertiary, as well as across 29 subsectors. Our results confirm the divergence of the magnitude, sign, and significance of the determinants across sectors and countries’ samples.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"84 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114538417","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 investigate the effects of the use of different sources of investment leverage, i.e. securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts, but we also find that investors who trade securities with embedded leverage show an even poorer performance than investors who trade on margin. The negative effect of leverage usage decreases with greater investor attention, measured by portfolio monitoring frequency. These results suggest that more attentive investors gain more from the use of investment leverage.
{"title":"Investor Attention and the Use of Leverage","authors":"D. Davydov, J. Peltomäki","doi":"10.2139/ssrn.3869603","DOIUrl":"https://doi.org/10.2139/ssrn.3869603","url":null,"abstract":"We investigate the effects of the use of different sources of investment leverage, i.e. securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts, but we also find that investors who trade securities with embedded leverage show an even poorer performance than investors who trade on margin. The negative effect of leverage usage decreases with greater investor attention, measured by portfolio monitoring frequency. These results suggest that more attentive investors gain more from the use of investment leverage.","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117284595","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 analyze clearing mechanisms in financial networks in which agents may have both monetary individual assets and mutual liabilities. A clearing mechanism prescribes mutual payments between agents to settle their mutual liabilities. The corresponding payments, summarized in a payment matrix, are made in accordance with agent specific claims rules that stem from the vast literature on claims problems. We show that large classes of centralized and decentralized clearing mechanisms all prescribe the same payment matrix under the condition that the underlying claims rules satisfy composition; a property satisfied by the proportional rule that is often applied in insolvency proceedings. This payment matrix is the one that contains the minimal amount of payments required to clear the network. In fact, we show that composition guarantees unification of clearing mechanisms in which agents pay simultaneously and clearing mechanisms in which agents pay sequentially in any arbitrary order. Therefore, for a given financial network, each clearing mechanism gives rise to the same transfer allocation. Moreover, we provide an axiomatic characterization of the corresponding mutual claims rule on the basis of five axioms: scale invariance, equal treatment of equals, composition, path independence and consistency. This characterization extends the analogous characterization for claims rules as given by Moulin (2000).
{"title":"On the Unification of Centralized and Decentralized Clearing Mechanisms in Financial Networks","authors":"M. Ketelaars, P. Borm","doi":"10.2139/ssrn.3868871","DOIUrl":"https://doi.org/10.2139/ssrn.3868871","url":null,"abstract":"We analyze clearing mechanisms in financial networks in which agents may have both monetary individual assets and mutual liabilities. A clearing mechanism prescribes mutual payments between agents to settle their mutual liabilities. The corresponding payments, summarized in a payment matrix, are made in accordance with agent specific claims rules that stem from the vast literature on claims problems. We show that large classes of centralized and decentralized clearing mechanisms all prescribe the same payment matrix under the condition that the underlying claims rules satisfy composition; a property satisfied by the proportional rule that is often applied in insolvency proceedings. This payment matrix is the one that contains the minimal amount of payments required to clear the network. In fact, we show that composition guarantees unification of clearing mechanisms in which agents pay simultaneously and clearing mechanisms in which agents pay sequentially in any arbitrary order. Therefore, for a given financial network, each clearing mechanism gives rise to the same transfer allocation. Moreover, we provide an axiomatic characterization of the corresponding mutual claims rule on the basis of five axioms: scale invariance, equal treatment of equals, composition, path independence and consistency. This characterization extends the analogous characterization for claims rules as given by Moulin (2000).","PeriodicalId":224430,"journal":{"name":"Decision-Making in Economics eJournal","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115441849","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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