This study examines the impact of integral emotions on portfolio decisions and asset prices. Using a new dictionary of anxiety- and excitement-related keywords, we measure the emotional state of the market and compute firm-level sensitivity to changes in market-level emotions (i.e., emotion beta). We find that stocks with high emotion betas outperform low emotion beta firms and this performance differential is corrected in about four months. During the 1990-2018 sample period, a Long-Short investment strategy with high-emotion beta stocks in the Long portfolio and low-emotion beta stocks in the Short generates an alpha of 4.92%. This evidence of emotion-based predictability is distinct from the known pricing effects of mood, sentiment, economic and policy uncertainty, and tone. Collectively, our findings show that emotional connections between investors and firms are priced.
{"title":"Anxiety, Excitement, and Asset Prices","authors":"Shehub Bin Hasan, Alok Kumar, R. Taffler","doi":"10.2139/ssrn.3902654","DOIUrl":"https://doi.org/10.2139/ssrn.3902654","url":null,"abstract":"This study examines the impact of integral emotions on portfolio decisions and asset prices. Using a new dictionary of anxiety- and excitement-related keywords, we measure the emotional state of the market and compute firm-level sensitivity to changes in market-level emotions (i.e., emotion beta). We find that stocks with high emotion betas outperform low emotion beta firms and this performance differential is corrected in about four months. During the 1990-2018 sample period, a Long-Short investment strategy with high-emotion beta stocks in the Long portfolio and low-emotion beta stocks in the Short generates an alpha of 4.92%. This evidence of emotion-based predictability is distinct from the known pricing effects of mood, sentiment, economic and policy uncertainty, and tone. Collectively, our findings show that emotional connections between investors and firms are priced.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"128 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85734400","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 likelihood of stopping an investment project differs after an experienced gain or loss. We investigate how the degree of involvement in prior decisions affects the subsequent decision to change an investment. To this end we conduct a lab-in-the-field experiment with professional participants from the finance department of a large infrastructure company. In line with the hypothesis and prior findings from student samples we find that lower involvement in the decision is associated with a higher likelihood of changing the investment project after a loss. However, this difference disappears with age and thus seniority in the professional career.
{"title":"Hire Someone to Blame: Degree of Involvement in Decisions and the Likelihood that Professionals Will Stop Investing after Experiencing Losses","authors":"Steve Heinke, Kevin Trutmann, Céline Rudin","doi":"10.2139/ssrn.3892106","DOIUrl":"https://doi.org/10.2139/ssrn.3892106","url":null,"abstract":"The likelihood of stopping an investment project differs after an experienced gain or loss. We investigate how the degree of involvement in prior decisions affects the subsequent decision to change an investment. To this end we conduct a lab-in-the-field experiment with professional participants from the finance department of a large infrastructure company. In line with the hypothesis and prior findings from student samples we find that lower involvement in the decision is associated with a higher likelihood of changing the investment project after a loss. However, this difference disappears with age and thus seniority in the professional career.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"62 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84495204","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 develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is positively correlated with the ratio of TAPP to the target’s pre-offer stock price; (2) TAPP dominates several other purchase-price estimators as an explanatory variable; (3) the TAPP effect is additive and about equal in its magnitude to that of the pre-offer 52-week-high price; (4) reference prices affect merger offers primarily through adjusting the offer premium; and (5) the reference-prices-induced increase in premium hurts acquirer shareholders. Our results portray TAPP as a promising shareholder purchase-price indicator.
{"title":"Behavioral Aspects of Merger Decisions: The Effect of Average Purchase Price and Other Reference Prices","authors":"Beni Lauterbach, Yevgeny Mugerman, Joshua Shemesh","doi":"10.2139/ssrn.3856462","DOIUrl":"https://doi.org/10.2139/ssrn.3856462","url":null,"abstract":"We develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is positively correlated with the ratio of TAPP to the target’s pre-offer stock price; (2) TAPP dominates several other purchase-price estimators as an explanatory variable; (3) the TAPP effect is additive and about equal in its magnitude to that of the pre-offer 52-week-high price; (4) reference prices affect merger offers primarily through adjusting the offer premium; and (5) the reference-prices-induced increase in premium hurts acquirer shareholders. Our results portray TAPP as a promising shareholder purchase-price indicator.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76497652","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 contribute to financial literature by identifying economic uncertainties salient to the price dynamics of cryptocurrencies. To measure this relationship, we examine the common stochastic trends between cryptocurrencies and major text-based uncertainty indices — categorical and broad — from the US and major developed economies from 2015 to 2021. Results from static factor tests using high-dimensional stochastic volatility factor models indicate trivial associations between global uncertainties and the crypto-sphere. Further investigation from dynamic implied correlation matrices, however, suggest that this phenomenon has undergone several changes over time. In fact, ties between US-based monetary policy uncertainties were non-trivial between 2015 to 2016. Following the post-Trump election bull run, the association faded, before reappearing upon the advent of the COVID-19 pandemic. Uncertainties surrounding some decisions by US government register minor significance. Uncertainties from European countries and China show some influence, with Japan registering an inverse relationship. Causality tests largely approbate these results, while underscoring an important point that while the pricing dynamics of cryptocurrencies may be independent from global uncertainties, their second moments remain attached to global trends. In sum, volatility in the crypto market is impacted by global uncertainties;prices are less so.
{"title":"What Uncertainties Matter to Cryptocurrencies?","authors":"I. Sifat","doi":"10.2139/ssrn.3886238","DOIUrl":"https://doi.org/10.2139/ssrn.3886238","url":null,"abstract":"We contribute to financial literature by identifying economic uncertainties salient to the price dynamics of cryptocurrencies. To measure this relationship, we examine the common stochastic trends between cryptocurrencies and major text-based uncertainty indices — categorical and broad — from the US and major developed economies from 2015 to 2021. Results from static factor tests using high-dimensional stochastic volatility factor models indicate trivial associations between global uncertainties and the crypto-sphere. Further investigation from dynamic implied correlation matrices, however, suggest that this phenomenon has undergone several changes over time. In fact, ties between US-based monetary policy uncertainties were non-trivial between 2015 to 2016. Following the post-Trump election bull run, the association faded, before reappearing upon the advent of the COVID-19 pandemic. Uncertainties surrounding some decisions by US government register minor significance. Uncertainties from European countries and China show some influence, with Japan registering an inverse relationship. Causality tests largely approbate these results, while underscoring an important point that while the pricing dynamics of cryptocurrencies may be independent from global uncertainties, their second moments remain attached to global trends. In sum, volatility in the crypto market is impacted by global uncertainties;prices are less so.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"72 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85486591","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}
Patricia M. Dechow, A. Lawrence, Mei Luo, Ventsislav Stamenov
We investigate whether there are temporary valuation impacts on stocks that media outlets list as involved in a major sporting event (the summer Olympics). We examine five summer Olympics and identify stocks that media outlets hype as benefiting from the Olympics (Olympic stocks). We find that Olympic stocks exhibit increases in comovement of returns after the announcement of the winning bid and declines in comovements after the games are played, consistent with the Olympics being used by investors as a category for investment. Furthermore, Olympic stock returns outperform their matched counterparts over this time period. If the comovement and valuation benefits are due to changes in underlying economics then we expect to observe corresponding increases in comovements of fundamentals and improvements in profitability. However, we find no observable changes in fundamental comovements or profitability. Consistent with investor sentiment driving the categorization, we find that Olympic firms with a greater retail investor presence have stronger comovements effects; and trading volume and volatility are abnormally high for Olympic firms on days where media outlets have stories linking the firm to the Olympic games. To clarify event-based categorization occurs in other settings where media outlets classify stocks for investment, we show comovement increases for stocks classified as “Stay-at-Home” by analysts and the media and “Meme” by retail investors on the Reddit social media platform.
{"title":"Media Attention and Stock Categorization: An Examination of Stocks Hyped to Benefit from the Olympics","authors":"Patricia M. Dechow, A. Lawrence, Mei Luo, Ventsislav Stamenov","doi":"10.2139/ssrn.3881333","DOIUrl":"https://doi.org/10.2139/ssrn.3881333","url":null,"abstract":"We investigate whether there are temporary valuation impacts on stocks that media outlets list as involved in a major sporting event (the summer Olympics). We examine five summer Olympics and identify stocks that media outlets hype as benefiting from the Olympics (Olympic stocks). We find that Olympic stocks exhibit increases in comovement of returns after the announcement of the winning bid and declines in comovements after the games are played, consistent with the Olympics being used by investors as a category for investment. Furthermore, Olympic stock returns outperform their matched counterparts over this time period. If the comovement and valuation benefits are due to changes in underlying economics then we expect to observe corresponding increases in comovements of fundamentals and improvements in profitability. However, we find no observable changes in fundamental comovements or profitability. Consistent with investor sentiment driving the categorization, we find that Olympic firms with a greater retail investor presence have stronger comovements effects; and trading volume and volatility are abnormally high for Olympic firms on days where media outlets have stories linking the firm to the Olympic games. To clarify event-based categorization occurs in other settings where media outlets classify stocks for investment, we show comovement increases for stocks classified as “Stay-at-Home” by analysts and the media and “Meme” by retail investors on the Reddit social media platform.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83100303","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 document contains supplementary materials to "On the Equilibrium Strategies for Time-Inconsistent Problems in Continuous Time" by X.D. He and Z.L. Jiang.
The paper to which these supplementary materials apply will appear in the SIAM Journal on Control and Optimization and is available at the following URL: https://papers.ssrn.com/abstract=3308274.
{"title":"Online Supplementary Material: On the Equilibrium Strategies for Time-Inconsistent Problems in Continuous Time","authors":"X. He, Zhaoli Jiang","doi":"10.2139/ssrn.3881455","DOIUrl":"https://doi.org/10.2139/ssrn.3881455","url":null,"abstract":"This document contains supplementary materials to \"On the Equilibrium Strategies for<br>Time-Inconsistent Problems in Continuous Time\" by X.D. He and Z.L. Jiang. <br><br>The paper to which these supplementary materials apply will appear in the SIAM Journal on Control and Optimization and is available at the following URL: https://papers.ssrn.com/abstract=3308274.<br>","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"142 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73204485","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}
M. Ammann, Alexander Cochardt, Simon Straumann, F. Weigert
We exploit variation in the ancestries of U.S. equity mutual fund managers and show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. The documented ancestral biases are pervasive across fund styles and across different manager ancestries. The effect is more pronounced for funds that are less resource-constrained and for managers whose connection to their ancestral home country is more recent. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestry, confirming that ancestry-linked investments are not informed.
{"title":"Back to the Roots: Ancestral Origin and Mutual Fund Manager Portfolio Choice","authors":"M. Ammann, Alexander Cochardt, Simon Straumann, F. Weigert","doi":"10.2139/ssrn.3879492","DOIUrl":"https://doi.org/10.2139/ssrn.3879492","url":null,"abstract":"We exploit variation in the ancestries of U.S. equity mutual fund managers and show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. The documented ancestral biases are pervasive across fund styles and across different manager ancestries. The effect is more pronounced for funds that are less resource-constrained and for managers whose connection to their ancestral home country is more recent. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestry, confirming that ancestry-linked investments are not informed.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"22 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89401316","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}
Edika G. Quispe-Torreblanca, David Hume, John Gathergood, G. Loewenstein, Neil Stewart
The disposition effect is the reluctance to sell assets at a loss relative to a salient point of reference. Typically, that referent has been assumed to be the purchase price, but other values can also assume prominence as reference points. Drawing on a model of multiple reference points, we test the idea that the peak price achieved by an asset constitutes an additional salient reference point for asset owners that overlaps, and interacts, with the purchase price reference point. We demonstrate this using administrative data documenting price changes and selling decisions for both housing and stocks.
{"title":"At the Top of the Mind: Peak Prices and the Disposition Effect","authors":"Edika G. Quispe-Torreblanca, David Hume, John Gathergood, G. Loewenstein, Neil Stewart","doi":"10.2139/ssrn.3879102","DOIUrl":"https://doi.org/10.2139/ssrn.3879102","url":null,"abstract":"The disposition effect is the reluctance to sell assets at a loss relative to a salient point of reference. Typically, that referent has been assumed to be the purchase price, but other values can also assume prominence as reference points. Drawing on a model of multiple reference points, we test the idea that the peak price achieved by an asset constitutes an additional salient reference point for asset owners that overlaps, and interacts, with the purchase price reference point. We demonstrate this using administrative data documenting price changes and selling decisions for both housing and stocks.<br>","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"6 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72725449","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 compare a variety of retirement products under cumulative prospect theory (CPT), including both well-known (variable) annuity products and some innovative, tontine-like retirement products, in which longevity risks are shared between insurers and policyholders. Following Hu and Scott (2007), an agent determines the overall CPT value by evaluating the total discounted payoffs over time compared to the initial investment made. Regarding the mortality-linked products, we find that tontines are widely preferred to annuities, tontines with guarantees and portfolios of annuities and tontines. Only in a few special cases, annuities deliver the highest CPT value. The reasons for the relative superiority of tontines is the presence of safety loadings or subjective mortality beliefs. Including financial market risk, variable annuities are found to be the most attractive source of retirement income under the majority of parameters considered. In some exceptional cases with safety loadings and some guarantee constraints, tontines with minimum guarantees can outperform variable annuities. Our results suggest that agents with CPT preferences prefer risk-carrying products with potentially higher returns to guaranteed annuities, providing alternatives to agents who are not fond of purchasing annuities.
{"title":"A CPT-Based Comparison of Retirement Products","authors":"A. Chen, Manuel Rach","doi":"10.2139/ssrn.3878236","DOIUrl":"https://doi.org/10.2139/ssrn.3878236","url":null,"abstract":"We compare a variety of retirement products under cumulative prospect theory (CPT), including both well-known (variable) annuity products and some innovative, tontine-like retirement products, in which longevity risks are shared between insurers and policyholders. Following Hu and Scott (2007), an agent determines the overall CPT value by evaluating the total discounted payoffs over time compared to the initial investment made. Regarding the mortality-linked products, we find that tontines are widely preferred to annuities, tontines with guarantees and portfolios of annuities and tontines. Only in a few special cases, annuities deliver the highest CPT value. The reasons for the relative superiority of tontines is the presence of safety loadings or subjective mortality beliefs. Including financial market risk, variable annuities are found to be the most attractive source of retirement income under the majority of parameters considered. In some exceptional cases with safety loadings and some guarantee constraints, tontines with minimum guarantees can outperform variable annuities. Our results suggest that agents with CPT preferences prefer risk-carrying products with potentially higher returns to guaranteed annuities, providing alternatives to agents who are not fond of purchasing annuities.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"43 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91304424","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 offer a novel test of whether an asset pricing model describes expected returns in the absence of mispricing. Our test assumes such a model assigns zero alpha to investment strategies using decade-old information. The CAPM satisfies this condition, but prominent multifactor models do not. While multifactor betas help capture current expected returns on mispriced stocks, persistence in those betas distorts the stocks' implied expected returns after prices correct. These results are most evident in large-cap stocks, whose multifactor betas are the most persistent. Hence, prominent multifactor models distort expected returns, absent mispricing, for even the largest, most liquid stocks. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
{"title":"Pricing Without Mispricing","authors":"Jianan Liu, T. Moskowitz, R. Stambaugh","doi":"10.2139/ssrn.3878375","DOIUrl":"https://doi.org/10.2139/ssrn.3878375","url":null,"abstract":"We offer a novel test of whether an asset pricing model describes expected returns in the absence of mispricing. Our test assumes such a model assigns zero alpha to investment strategies using decade-old information. The CAPM satisfies this condition, but prominent multifactor models do not. While multifactor betas help capture current expected returns on mispriced stocks, persistence in those betas distorts the stocks' implied expected returns after prices correct. These results are most evident in large-cap stocks, whose multifactor betas are the most persistent. Hence, prominent multifactor models distort expected returns, absent mispricing, for even the largest, most liquid stocks. \u0000 \u0000Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"352 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82603435","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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