We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature—it is more difficult to gain it than to lose it.
{"title":"Trust in Lending","authors":"Richard T. Thakor, R. C. Merton","doi":"10.2139/ssrn.3201689","DOIUrl":"https://doi.org/10.2139/ssrn.3201689","url":null,"abstract":"We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature—it is more difficult to gain it than to lose it.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123632648","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}
Félix Villatoro, Olga Fuentes, Julio Riutort, Pamela Searle
We study individuals' incentives to make investment decisions. Using data from a large pension system in Chile we find that individuals who are active in managing their investments have, on average, poor performance. We provide robust evidence suggesting that learning plays an important part in this phenomenon. Indeed, individuals who have made successful investment decisions in the past go on to trade more frequently. However, this result holds when using a naive definition for successful decisions. Also, average performance is negatively related to the number of investment decisions, casting doubt on the existence of market timing skills.
{"title":"Mislearning and (Poor) Performance of Individual Investors","authors":"Félix Villatoro, Olga Fuentes, Julio Riutort, Pamela Searle","doi":"10.2139/ssrn.3178948","DOIUrl":"https://doi.org/10.2139/ssrn.3178948","url":null,"abstract":"\u0000 We study individuals' incentives to make investment decisions. Using data from a large pension system in Chile we find that individuals who are active in managing their investments have, on average, poor performance. We provide robust evidence suggesting that learning plays an important part in this phenomenon. Indeed, individuals who have made successful investment decisions in the past go on to trade more frequently. However, this result holds when using a naive definition for successful decisions. Also, average performance is negatively related to the number of investment decisions, casting doubt on the existence of market timing skills.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129860914","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}
Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk neutral probability density (RND) over the underlying price at expiration. The RND contains investors' beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With particular focus on U.S. equity options, this article reviews the historical development of this powerful concept, practical details of fitting an RND to option market prices, and the many ways in which investigators have tried to distill true expectations and risk premia from observed RNDs. I touch on areas of active current research including the "pricing kernel puzzle" and the "volatility surface," and offer thoughts on what has been learned about RNDs so far and fruitful directions for future research.
{"title":"Risk Neutral Densities: A Review","authors":"Stephen Figlewski","doi":"10.2139/ssrn.3120028","DOIUrl":"https://doi.org/10.2139/ssrn.3120028","url":null,"abstract":"Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk neutral probability density (RND) over the underlying price at expiration. The RND contains investors' beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With particular focus on U.S. equity options, this article reviews the historical development of this powerful concept, practical details of fitting an RND to option market prices, and the many ways in which investigators have tried to distill true expectations and risk premia from observed RNDs. I touch on areas of active current research including the \"pricing kernel puzzle\" and the \"volatility surface,\" and offer thoughts on what has been learned about RNDs so far and fruitful directions for future research.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"2010 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125602408","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}
Pub Date : 2018-03-10DOI: 10.20491/ISARDER.2018.369
M. Akkaya, Ayben Koy
Due to the evolutions in the financial markets, characteristics of markets have been changed. It has become important to discuss the markets which the fast and frequent fluctuations are observed among the regimes they belong to. There are two main purpose of the study. The first purpose of the study is to investigate whether mutual regime switching behavior exists in the selected equity markets. To investigate the importance of growth of the selected economies which the equity markets belong, is the second purpose of the study. Three regime multivariate Markov switching vector autoregressive (MSI(M)-VAR(p)) models are used to define common regime switching behavior of the indices calculated.
{"title":"Mutual Switching Behavior between High Growth and Low Growth Economies’ Stock Markets","authors":"M. Akkaya, Ayben Koy","doi":"10.20491/ISARDER.2018.369","DOIUrl":"https://doi.org/10.20491/ISARDER.2018.369","url":null,"abstract":"Due to the evolutions in the financial markets, characteristics of markets have been changed. It has become important to discuss the markets which the fast and frequent fluctuations are observed among the regimes they belong to. There are two main purpose of the study. The first purpose of the study is to investigate whether mutual regime switching behavior exists in the selected equity markets. To investigate the importance of growth of the selected economies which the equity markets belong, is the second purpose of the study. Three regime multivariate Markov switching vector autoregressive (MSI(M)-VAR(p)) models are used to define common regime switching behavior of the indices calculated.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121204887","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 aims to examine the impact of product involvement, subjective norm and perceived behavioural control on investment intentions of individual investors in Pakistan. The data was collected from 548 individual investors in Pakistan using systematic random sampling. The data analysis was done using descriptive and inferential statistics. The results of the analysis showed that product involvement and subjective norm have a significant impact on investment intention of individual investors in Pakistan. On the other hand, the perceived behavioural control appears as insignificant in influencing the investment intentions of individual investors. The results of the analysis can be helpful for the investment advisors in efforts to increase the level of involvement. They need to develop and promote customised investment portfolios for their customers that suit their risk profile, investment objectives and financial constraints.
{"title":"Examining the Impact of Product Involvement, Subjective Norm and Perceived Behavioral Control on Investment Intentions of Individual Investors in Pakistan","authors":"Yusnidah Ibrahim, I. Arshad","doi":"10.2139/ssrn.3095175","DOIUrl":"https://doi.org/10.2139/ssrn.3095175","url":null,"abstract":"This study aims to examine the impact of product involvement, subjective norm and perceived behavioural control on investment intentions of individual investors in Pakistan. The data was collected from 548 individual investors in Pakistan using systematic random sampling. The data analysis was done using descriptive and inferential statistics. The results of the analysis showed that product involvement and subjective norm have a significant impact on investment intention of individual investors in Pakistan. On the other hand, the perceived behavioural control appears as insignificant in influencing the investment intentions of individual investors. The results of the analysis can be helpful for the investment advisors in efforts to increase the level of involvement. They need to develop and promote customised investment portfolios for their customers that suit their risk profile, investment objectives and financial constraints.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128113794","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 hypothesize that when investors pay less attention to financial markets, they rationally allocate relatively more attention to market-level information than to firm-specific information, leading to increases in stock return co-movements. Using large jackpot lotteries as exogenous shocks that attract investors’ attention away from the stock market, we find supportive evidence that stock returns co-move more with the market on large jackpot days. This effect is stronger for stocks preferred by retail investors and is not driven by gambling sentiment. We also find that stock returns are less sensitive to earnings surprises and co-move more with industries on large jackpot days.
{"title":"Attention Allocation and Return Co-Movement: Evidence from Repeated Natural Experiments","authors":"Shiyang Huang, Yulin Huang, Tse-Chun Lin","doi":"10.2139/ssrn.2872078","DOIUrl":"https://doi.org/10.2139/ssrn.2872078","url":null,"abstract":"Abstract We hypothesize that when investors pay less attention to financial markets, they rationally allocate relatively more attention to market-level information than to firm-specific information, leading to increases in stock return co-movements. Using large jackpot lotteries as exogenous shocks that attract investors’ attention away from the stock market, we find supportive evidence that stock returns co-move more with the market on large jackpot days. This effect is stronger for stocks preferred by retail investors and is not driven by gambling sentiment. We also find that stock returns are less sensitive to earnings surprises and co-move more with industries on large jackpot days.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131440682","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 conducted experiments to elicit risk attitudes and time preferences for 161 participants up to the age of 84 years old. These are compared to their self-reported behavior in daily financial matters. The results show that individual differences in financial behavior are significant in predicting risk and time preferences. Risk aversion is linked to precautionary saving and spending and is inversely correlated with an interest in finance. More consistent time discounting goes with an interest in finance and concern about saving, whereas the level of anxiety predicts hyperbolic discounting behavior.
{"title":"Risk and Time Preference in Consumer Financial Behavior","authors":"B. Fünfgeld, Mei Wang","doi":"10.2139/ssrn.3059481","DOIUrl":"https://doi.org/10.2139/ssrn.3059481","url":null,"abstract":"We conducted experiments to elicit risk attitudes and time preferences for 161 participants up to the age of 84 years old. These are compared to their self-reported behavior in daily financial matters. The results show that individual differences in financial behavior are significant in predicting risk and time preferences. Risk aversion is linked to precautionary saving and spending and is inversely correlated with an interest in finance. More consistent time discounting goes with an interest in finance and concern about saving, whereas the level of anxiety predicts hyperbolic discounting behavior.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124330447","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 studies the relation between local attitudes towards gambling and corporate liquidity. I find that firms exposed to stronger gambling preference hold significantly more cash, because cash enables them to take more risk while staying away from financial distress. Furthermore, I show that gambling-prone firms hold more cash only when they are financially constrained, and these firms also have higher marginal value of cash holding. Corporate headquarter relocation confirms the causal impact of gambling preference on cash holding. Taken together, these findings suggest that greater cash holding in gambling-prone firms is a value-increasing policy due to their strong risk-taking incentive.
{"title":"Local Gambling Preference and Corporate Cash Policy","authors":"Wei Li","doi":"10.2139/ssrn.2931690","DOIUrl":"https://doi.org/10.2139/ssrn.2931690","url":null,"abstract":"This paper studies the relation between local attitudes towards gambling and corporate liquidity. I find that firms exposed to stronger gambling preference hold significantly more cash, because cash enables them to take more risk while staying away from financial distress. Furthermore, I show that gambling-prone firms hold more cash only when they are financially constrained, and these firms also have higher marginal value of cash holding. Corporate headquarter relocation confirms the causal impact of gambling preference on cash holding. Taken together, these findings suggest that greater cash holding in gambling-prone firms is a value-increasing policy due to their strong risk-taking incentive.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121498239","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 herding behaviour exhibited by Dutch pension funds in the sovereign bond market. It uses a unique dataset on sovereign bond holdings of pension funds, mutations and transactions between December 2008 and December 2014. It covers 67 large Dutch pension funds that invest in 109 countries. We find evidence of intensive herding behaviour of Dutch pension funds in sovereign bonds. Our findings also show that institutional factors, the macroeconomic environment and the financial market environment are among the determinants of herding behaviour in sovereign bonds. Our results also indicate that high diversification is not without costs as it intensifies herding behaviour. We find mixed evidence on whether pension funds are stabilising actors. The destabilising effect is most pronounced on the sell side, while stabilisation is most prominent under more extreme price shocks. The distinction between developing and emerging economies and developed economies does not change these results.
{"title":"Herding Behaviour of Dutch Pension Funds in Sovereign Bond Investments","authors":"I. Koetsier, J. Bikker","doi":"10.2139/ssrn.3041258","DOIUrl":"https://doi.org/10.2139/ssrn.3041258","url":null,"abstract":"This study investigates herding behaviour exhibited by Dutch pension funds in the sovereign bond market. It uses a unique dataset on sovereign bond holdings of pension funds, mutations and transactions between December 2008 and December 2014. It covers 67 large Dutch pension funds that invest in 109 countries. We find evidence of intensive herding behaviour of Dutch pension funds in sovereign bonds. Our findings also show that institutional factors, the macroeconomic environment and the financial market environment are among the determinants of herding behaviour in sovereign bonds. Our results also indicate that high diversification is not without costs as it intensifies herding behaviour. We find mixed evidence on whether pension funds are stabilising actors. The destabilising effect is most pronounced on the sell side, while stabilisation is most prominent under more extreme price shocks. The distinction between developing and emerging economies and developed economies does not change these results.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129618552","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}
In this paper, we develop a novel, intuitive and objective measure of time-varying parameter uncertainty (PU) based on a simple statistical test. Investors who are averse to parameter uncertainty will react to elevated levels of PU by withdrawing from the market and causing prices to fall, a behavior that is well described by the model of portfolio selection with parameter uncertainty of Garlappi et al. (2007). We show that this model in combination with our measure, outperforms all other tested variables including the strongest known predictor to date. Additionally, it is the only predictor that fulfills all criteria generally expected from a stable predictor of the equity premium. All our results are statistically and economically significant and robust to a large variety of different specifications.
{"title":"Parameter Uncertainty, Financial Turbulence and Aggregate Stock Returns","authors":"Sebastian Stöckl","doi":"10.2139/ssrn.2988568","DOIUrl":"https://doi.org/10.2139/ssrn.2988568","url":null,"abstract":"In this paper, we develop a novel, intuitive and objective measure of time-varying parameter uncertainty (PU) based on a simple statistical test. Investors who are averse to parameter uncertainty will react to elevated levels of PU by withdrawing from the market and causing prices to fall, a behavior that is well described by the model of portfolio selection with parameter uncertainty of Garlappi et al. (2007). We show that this model in combination with our measure, outperforms all other tested variables including the strongest known predictor to date. Additionally, it is the only predictor that fulfills all criteria generally expected from a stable predictor of the equity premium. All our results are statistically and economically significant and robust to a large variety of different specifications.","PeriodicalId":365642,"journal":{"name":"ERN: Behavioral Finance (Microeconomics) (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130648890","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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