A growing literature in economics explores the relationship between personal experiences with the business cycle and belief/preference formation. There exists substantial evidence using national variation in business cycles that personal experiences hold substantial weight in decision-making. However, the use of national aggregates limits researchers to the use of variation in decisions across birth-cohorts. Using state-level personal income for the majority of the 20th century, I investigate whether individual investment decisions are altered by sub-national economic fluctuations. Along with providing evidence that preferences/beliefs about investment begin to form in late childhood, my results suggest that children who grew up in states with lower average personal income invest less in risky assets throughout their lives, invest more in property, and are less likely to be self employed.
{"title":"The Long-Run Influence of Local Economic Conditions on Financial Decision-Making","authors":"E. McGuire","doi":"10.2139/ssrn.3389389","DOIUrl":"https://doi.org/10.2139/ssrn.3389389","url":null,"abstract":"A growing literature in economics explores the relationship between personal experiences with the business cycle and belief/preference formation. There exists substantial evidence using national variation in business cycles that personal experiences hold substantial weight in decision-making. However, the use of national aggregates limits researchers to the use of variation in decisions across birth-cohorts. Using state-level personal income for the majority of the 20th century, I investigate whether individual investment decisions are altered by sub-national economic fluctuations. Along with providing evidence that preferences/beliefs about investment begin to form in late childhood, my results suggest that children who grew up in states with lower average personal income invest less in risky assets throughout their lives, invest more in property, and are less likely to be self employed.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-05-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131616037","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}
That the FMVS’s lack of compulsion assumption is synonymous with the Hypothetical Seller’s ability and willingness to expose his non-marketable asset, to the Hypothetical Marketplace, for ample and sufficient time, is generally acknowledged. What is not acknowledged, however, is (i.) he, being uncompelled, is indifferent between selling and not selling (which is what lack of compulsion means), (ii.) his indifference is manifested in his ability, and willingness, to offer his non-marketable asset for as long as it takes to sell at the going market price (any lesser exposure would be evidence of a material form, or degree, of compulsion to sell), (iii.) the Hypothetical Marketplace is competitive and, thus, the going market price is the competitive price, and (iv.) together, taken to their logical and unmistakable end, they provide substantive proof that any form of DLOM is, and always has been, untenable under a scrupulous application of the FMVS in appraisal practice.
{"title":"Uncompelled Hypothetical Investors: Implications for Appraisal Practice","authors":"Peter C. Dawson","doi":"10.2139/ssrn.2935304","DOIUrl":"https://doi.org/10.2139/ssrn.2935304","url":null,"abstract":"That the FMVS’s lack of compulsion assumption is synonymous with the Hypothetical Seller’s ability and willingness to expose his non-marketable asset, to the Hypothetical Marketplace, for ample and sufficient time, is generally acknowledged. What is not acknowledged, however, is (i.) he, being uncompelled, is indifferent between selling and not selling (which is what lack of compulsion means), (ii.) his indifference is manifested in his ability, and willingness, to offer his non-marketable asset for as long as it takes to sell at the going market price (any lesser exposure would be evidence of a material form, or degree, of compulsion to sell), (iii.) the Hypothetical Marketplace is competitive and, thus, the going market price is the competitive price, and (iv.) together, taken to their logical and unmistakable end, they provide substantive proof that any form of DLOM is, and always has been, untenable under a scrupulous application of the FMVS in appraisal practice.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"97 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122310359","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}
Abstract The sovereign CDS market has developed rapidly for two decades and currently has a gross notional amount of more than a trillion dollars. We document a strong momentum effect in this market, which cannot be explained by a large set of risk factors. These momentum returns are positively skewed and higher during recessions. Consistent with the interpretation that this momentum effect is due to investors’ initial underreaction to sovereign credit information followed by corrections, our evidence shows that the momentum returns tend to be higher during the months surrounding announcements of credit rating or outlook changes of the underlying countries.
{"title":"Under-reaction in the Sovereign CDS Market","authors":"Xinjie Wang, Yaqing Xiao, Hongjun Yan, Jinfan Zhang","doi":"10.2139/ssrn.3372551","DOIUrl":"https://doi.org/10.2139/ssrn.3372551","url":null,"abstract":"Abstract The sovereign CDS market has developed rapidly for two decades and currently has a gross notional amount of more than a trillion dollars. We document a strong momentum effect in this market, which cannot be explained by a large set of risk factors. These momentum returns are positively skewed and higher during recessions. Consistent with the interpretation that this momentum effect is due to investors’ initial underreaction to sovereign credit information followed by corrections, our evidence shows that the momentum returns tend to be higher during the months surrounding announcements of credit rating or outlook changes of the underlying countries.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"94 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131166285","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}
Reflexivity is the idea that investors' biased beliefs affect market outcomes, and that market outcomes in turn affect investors' beliefs. We develop a behavioral model of the credit cycle featuring such a two-way feedback loop. In our model, investors form beliefs about firms' creditworthiness, in part, by extrapolating past default rates. Investor beliefs influence firms' actual creditworthiness because firms that can refinance maturing debt on favorable terms are less likely to default in the short-run—even if fundamentals do not justify investors' generosity. Our model is able to match many features of credit booms and busts, including the imperfect synchronization of credit cycles with the real economy, the negative relationship between past credit growth and the future return on risky bonds, and "calm before the storm" periods in which firm fundamentals have deteriorated but the credit market has not yet turned.
{"title":"Reflexivity in Credit Markets","authors":"R. Greenwood, S. Hanson, Lawrence J. Jin","doi":"10.3386/W25747","DOIUrl":"https://doi.org/10.3386/W25747","url":null,"abstract":"Reflexivity is the idea that investors' biased beliefs affect market outcomes, and that market outcomes in turn affect investors' beliefs. We develop a behavioral model of the credit cycle featuring such a two-way feedback loop. In our model, investors form beliefs about firms' creditworthiness, in part, by extrapolating past default rates. Investor beliefs influence firms' actual creditworthiness because firms that can refinance maturing debt on favorable terms are less likely to default in the short-run—even if fundamentals do not justify investors' generosity. Our model is able to match many features of credit booms and busts, including the imperfect synchronization of credit cycles with the real economy, the negative relationship between past credit growth and the future return on risky bonds, and \"calm before the storm\" periods in which firm fundamentals have deteriorated but the credit market has not yet turned.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124247405","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}
Disagreement affects asset prices and several asset specific sources of disagreement have been identified. Still relatively little is known about the potential exogenous sources. This article presents evidence that one such exogenous source is societal trust. Trust leads to two kinds of behavior - reliance on others and disclosure to others. These two behaviors can impact disagreement in diverse ways. We show that higher trust increases reliance, which leads to lower earnings disagreement. On the contrary, higher trust also increases disclosure which leads to higher target price disagreement. Additionally, trust enhances risk taking which is also positively associated with target price disagreement. In addition, the context in trust also matters. Trust in corporates reduces both forms of disagreement. Trust in the press, however, decreases disagreement in earnings estimates while increasing disagreement in target price. Hence, trust effects disagreement in a highly nuanced manner depending on the form of disagreement and context of trust.
{"title":"Trust Based Origins of Disagreement in Financial Markets","authors":"Anmol Sethy","doi":"10.2139/ssrn.2930741","DOIUrl":"https://doi.org/10.2139/ssrn.2930741","url":null,"abstract":"Disagreement affects asset prices and several asset specific sources of disagreement have been identified. Still relatively little is known about the potential exogenous sources. This article presents evidence that one such exogenous source is societal trust. Trust leads to two kinds of behavior - reliance on others and disclosure to others. These two behaviors can impact disagreement in diverse ways. We show that higher trust increases reliance, which leads to lower earnings disagreement. On the contrary, higher trust also increases disclosure which leads to higher target price disagreement. Additionally, trust enhances risk taking which is also positively associated with target price disagreement. In addition, the context in trust also matters. Trust in corporates reduces both forms of disagreement. Trust in the press, however, decreases disagreement in earnings estimates while increasing disagreement in target price. Hence, trust effects disagreement in a highly nuanced manner depending on the form of disagreement and context of trust.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-03-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133550957","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 study investigates the role of money illusion in a broad set of anomaly-based strategies. To the extent that anomalies reflect mispricing, I examine whether money illusion predicts anomaly returns. I find that, following periods of high inflation, anomalies are stronger and returns in short leg portfolios are lower. However, following periods of deflation, returns in short leg portfolios are not lower and long-short strategies are not profitable. These findings indicate that money-illusioned investors excessively extrapolate the upside potential of stocks in short leg portfolios following periods of high inflation and, subsequently, experience negative returns. I find the effect of money illusion to remain largely unchanged after controlling for sentiment. Overall, this study presents evidence that money illusion leads to mispricing in the stock market.
{"title":"Does Money Illusion Delude Investors?","authors":"Yuna Heo","doi":"10.2139/ssrn.3353245","DOIUrl":"https://doi.org/10.2139/ssrn.3353245","url":null,"abstract":"This study investigates the role of money illusion in a broad set of anomaly-based strategies. To the extent that anomalies reflect mispricing, I examine whether money illusion predicts anomaly returns. I find that, following periods of high inflation, anomalies are stronger and returns in short leg portfolios are lower. However, following periods of deflation, returns in short leg portfolios are not lower and long-short strategies are not profitable. These findings indicate that money-illusioned investors excessively extrapolate the upside potential of stocks in short leg portfolios following periods of high inflation and, subsequently, experience negative returns. I find the effect of money illusion to remain largely unchanged after controlling for sentiment. Overall, this study presents evidence that money illusion leads to mispricing in the stock market.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128227897","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 describes asset price and return disturbances as result of relations between transactions and multiple kinds of expectations. We show that disturbances of expectations can cause fluctuations of trade volume, price and return. We model price disturbances for transactions made under all types of expectations as weighted sum of partial price and trade volume disturbances for transactions made under separate kinds of expectations. Relations on price allow present return as weighted sum of partial return and trade volume “return” for transactions made under separate expectations. Dependence of price disturbances on trade volume disturbances as well as dependence of return on trade volume “return” cause dependence of volatility and statistical distributions of price and return on statistical properties of trade volume disturbances and trade volume “return” respectively.
{"title":"Econophysics of Asset Price, Return and Multiple Expectations","authors":"Victor Olkhov","doi":"10.2139/ssrn.3319018","DOIUrl":"https://doi.org/10.2139/ssrn.3319018","url":null,"abstract":"This paper describes asset price and return disturbances as result of relations between transactions and multiple kinds of expectations. We show that disturbances of expectations can cause fluctuations of trade volume, price and return. We model price disturbances for transactions made under all types of expectations as weighted sum of partial price and trade volume disturbances for transactions made under separate kinds of expectations. Relations on price allow present return as weighted sum of partial return and trade volume “return” for transactions made under separate expectations. Dependence of price disturbances on trade volume disturbances as well as dependence of return on trade volume “return” cause dependence of volatility and statistical distributions of price and return on statistical properties of trade volume disturbances and trade volume “return” respectively.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-01-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122070335","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}
Continuously rebalanced long-short trades are similar to highly levered trades in that their PNL profile depends not only on the final distribution of return, but also on the realized co-variance structure of the asset pair. It's easily possible for both orientations of a rebalanced long-short to trade lose money.
{"title":"If George Costanza Were a Hedge Fund Manager","authors":"James White, Victor Haghani","doi":"10.2139/ssrn.3315624","DOIUrl":"https://doi.org/10.2139/ssrn.3315624","url":null,"abstract":"Continuously rebalanced long-short trades are similar to highly levered trades in that their PNL profile depends not only on the final distribution of return, but also on the realized co-variance structure of the asset pair. It's easily possible for both orientations of a rebalanced long-short to trade lose money.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-01-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130740261","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. Marcelin, Sheryl-Ann K. Stephen, Fassil Fanta, M. Teclezion
Abstract This study looks at firm’s investment spending in fixed and intangible assets around three types of national elections: presidential, joint presidential and legislative, and parliamentary elections. Investment in fixed assets declines by up to 2.3% during presidential elections, and 4.43% in joint presidential and legislative elections years. On the other hand, intangible investment decreases by 4.47% in parliamentary election years. Moreover, investment responses to electoral shocks differ markedly within political systems and countries’ institutional settings. Investment levels shift significantly downward in pre- and resume in postelection years. The electoral effect results in a net loss in investment over the election cycle.
{"title":"Political Regimes, Investment and Electoral Uncertainty","authors":"I. Marcelin, Sheryl-Ann K. Stephen, Fassil Fanta, M. Teclezion","doi":"10.2139/ssrn.3401514","DOIUrl":"https://doi.org/10.2139/ssrn.3401514","url":null,"abstract":"Abstract This study looks at firm’s investment spending in fixed and intangible assets around three types of national elections: presidential, joint presidential and legislative, and parliamentary elections. Investment in fixed assets declines by up to 2.3% during presidential elections, and 4.43% in joint presidential and legislative elections years. On the other hand, intangible investment decreases by 4.47% in parliamentary election years. Moreover, investment responses to electoral shocks differ markedly within political systems and countries’ institutional settings. Investment levels shift significantly downward in pre- and resume in postelection years. The electoral effect results in a net loss in investment over the election cycle.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"83 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114372249","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}
Abstract We document that the fundamental strength (FSCORE) of a firm exerts a significant influence on the performance of short-term reversal strategies. Past losers with strong fundamentals significantly outperform past winners with weak fundamentals. Our FSCORE approach is complementary to Da et al. (2014) cash flow news metrics based on analysts’ forecast revisions in that many firms do not have analyst following. Our approach also seems capable of capturing the lagged effects from past fundamental news shocks. After controlling for fundamental strength, we find that investor sentiment plays a more dominant role than do liquidity shocks in explaining return reversal.
{"title":"Fundamental Strength and Short-Term Return Reversal","authors":"Zhaobo Zhu, Licheng Sun, Min Chen","doi":"10.2139/ssrn.3097420","DOIUrl":"https://doi.org/10.2139/ssrn.3097420","url":null,"abstract":"Abstract We document that the fundamental strength (FSCORE) of a firm exerts a significant influence on the performance of short-term reversal strategies. Past losers with strong fundamentals significantly outperform past winners with weak fundamentals. Our FSCORE approach is complementary to Da et al. (2014) cash flow news metrics based on analysts’ forecast revisions in that many firms do not have analyst following. Our approach also seems capable of capturing the lagged effects from past fundamental news shocks. After controlling for fundamental strength, we find that investor sentiment plays a more dominant role than do liquidity shocks in explaining return reversal.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123185149","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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