The Easterlin Paradox states that average well-being is insensitive to average income growth over time. It also manifests itself in housing markets, where housing satisfaction does not rise as housing wealth increases in the long run. Based on prospect theory, we develop a behavioural framework to explain the Easterlin Paradox in housing markets. Two hypotheses, i.e., social comparison and adaptation, are tested by using household panel survey data from the UK. We find support to the social comparison hypothesis. Individual’s asymmetric response to changes in housing wealth distribution, i.e., loss aversion experienced by the worse-off group, could offset the gain from an increase in housing wealth at the aggregate level. As a result, housing wealth growth does not necessarily improve housing satisfaction for the society as a whole if it leads to housing wealth inequality. Although our empirical evidence is from the UK, regional disparity of housing prices is commonplace in many parts of the world. Our findings are particularly relevant to developing countries, where economic growth is often accompanied by widening income gap and rising wealth inequality. Policymakers should be mindful about the far-reaching effect of housing wealth inequality. Given the significant impact of housing wealth distribution on housing satisfaction, and ultimately people’s general wellbeing, it is important to tackle inequality in housing markets.
{"title":"A Behavioural Investigation of the Easterlin Paradox in Housing Markets","authors":"Helen X. H. Bao, Chunming Meng","doi":"10.2139/ssrn.3813739","DOIUrl":"https://doi.org/10.2139/ssrn.3813739","url":null,"abstract":"The Easterlin Paradox states that average well-being is insensitive to average income growth over time. It also manifests itself in housing markets, where housing satisfaction does not rise as housing wealth increases in the long run. Based on prospect theory, we develop a behavioural framework to explain the Easterlin Paradox in housing markets. Two hypotheses, i.e., social comparison and adaptation, are tested by using household panel survey data from the UK. We find support to the social comparison hypothesis. Individual’s asymmetric response to changes in housing wealth distribution, i.e., loss aversion experienced by the worse-off group, could offset the gain from an increase in housing wealth at the aggregate level. As a result, housing wealth growth does not necessarily improve housing satisfaction for the society as a whole if it leads to housing wealth inequality. Although our empirical evidence is from the UK, regional disparity of housing prices is commonplace in many parts of the world. Our findings are particularly relevant to developing countries, where economic growth is often accompanied by widening income gap and rising wealth inequality. Policymakers should be mindful about the far-reaching effect of housing wealth inequality. Given the significant impact of housing wealth distribution on housing satisfaction, and ultimately people’s general wellbeing, it is important to tackle inequality in housing markets.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82832900","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}
Christine Laudenbach, Annika Weber, Johannes Wohlfart
We survey clients of a German online bank to study retail investors' beliefs about the autocorrelation of annual returns of the aggregate stock market, and the role of these beliefs in financial decisions. A majority of our respondents believe in mean reversion of aggregate returns, and these beliefs predict how respondents adjust their portfolios in response to market movements. We provide a random half of our respondents with historical information on the low predictive power of realized returns for year-ahead returns. The information intervention persistently reduces respondents' perceived predictability of aggregate stock returns, and shifts their expected year-ahead return towards the unconditional historical average. There are only minor adjustments of portfolio decisions in the short-term in response to the information. However, among those believing in mean reversion before the intervention, treated respondents display a significantly smaller increase in equity purchases in response to the COVID-19 stock market crash four to five months after the treatment. Our results provide causal evidence on the role of beliefs in trading decisions, and have implications for modeling household behavior and financial market dynamics.
{"title":"Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment","authors":"Christine Laudenbach, Annika Weber, Johannes Wohlfart","doi":"10.2139/ssrn.3812346","DOIUrl":"https://doi.org/10.2139/ssrn.3812346","url":null,"abstract":"We survey clients of a German online bank to study retail investors' beliefs about the autocorrelation of annual returns of the aggregate stock market, and the role of these beliefs in financial decisions. A majority of our respondents believe in mean reversion of aggregate returns, and these beliefs predict how respondents adjust their portfolios in response to market movements. We provide a random half of our respondents with historical information on the low predictive power of realized returns for year-ahead returns. The information intervention persistently reduces respondents' perceived predictability of aggregate stock returns, and shifts their expected year-ahead return towards the unconditional historical average. There are only minor adjustments of portfolio decisions in the short-term in response to the information. However, among those believing in mean reversion before the intervention, treated respondents display a significantly smaller increase in equity purchases in response to the COVID-19 stock market crash four to five months after the treatment. Our results provide causal evidence on the role of beliefs in trading decisions, and have implications for modeling household behavior and financial market dynamics.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"2008 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82547733","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}
Samuelson’s Dictum refers to the conjecture that there is more informational inefficiency at the aggregate stock market level than at the individual stock level. Our paper recasts it in a global setup: there should be more informational inefficiency at the global level than at the country level. We find that sovereign CDS spreads can predict future stock index returns, GDP, and PMI of their underlying countries. Consistent with the global version of Samuelson’s Dictum, the predictive power for both stock returns and macro variables is almost entirely from the global, rather than country-specific, information from the sovereign CDS market.
{"title":"A Global Version of Samuelson’s Dictum","authors":"Yaqing Xiao, Hongjun Yan, Jinfan Zhang","doi":"10.2139/ssrn.3810241","DOIUrl":"https://doi.org/10.2139/ssrn.3810241","url":null,"abstract":"Samuelson’s Dictum refers to the conjecture that there is more informational inefficiency at the aggregate stock market level than at the individual stock level. Our paper recasts it in a global setup: there should be more informational inefficiency at the global level than at the country level. We find that sovereign CDS spreads can predict future stock index returns, GDP, and PMI of their underlying countries. Consistent with the global version of Samuelson’s Dictum, the predictive power for both stock returns and macro variables is almost entirely from the global, rather than country-specific, information from the sovereign CDS market.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82119593","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 data from social media platform Reddit from 2020 and 2021, we examine how stock prices, retail trading and short-selling are inter-connected with social media activity. More Reddit traffic, more positive tones, more disagreement and higher connectedness at Reddit lead to higher returns, higher retail order flow, and lower shorting flows on the next trading day. The information content of the social activity variables is different from that of retail order flows and shorting flows, and they are each a significant predictor for future returns. Interestingly, when there is higher traffic, more positive tone, more disagreement and higher connectedness on Reddit, the shorting flows become even more informative and predict even lower future returns. A closer look at Robinhood 50 stocks shows that these stocks are more affected by social media activity. Positive retail order flows predict even higher future returns for these stocks, while heavy shorting flows in these stocks also more significantly predict low future returns.
{"title":"The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery","authors":"Danqi Hu, C. Jones, Valerie Zhang, Xiaoyan Zhang","doi":"10.2139/ssrn.3807655","DOIUrl":"https://doi.org/10.2139/ssrn.3807655","url":null,"abstract":"Using data from social media platform Reddit from 2020 and 2021, we examine how stock prices, retail trading and short-selling are inter-connected with social media activity. More Reddit traffic, more positive tones, more disagreement and higher connectedness at Reddit lead to higher returns, higher retail order flow, and lower shorting flows on the next trading day. The information content of the social activity variables is different from that of retail order flows and shorting flows, and they are each a significant predictor for future returns. Interestingly, when there is higher traffic, more positive tone, more disagreement and higher connectedness on Reddit, the shorting flows become even more informative and predict even lower future returns. A closer look at Robinhood 50 stocks shows that these stocks are more affected by social media activity. Positive retail order flows predict even higher future returns for these stocks, while heavy shorting flows in these stocks also more significantly predict low future returns.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"23 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75051200","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}
B. V. Doornik, Armando Gomes, David Schoenherr, J. Skrastins
We assess the employment and income effects of access to credit dedicated to investment in individual mobility (a motorcycle). For identification, we exploit random time-series variation in access to credit through random lotteries for participants in a group-lending mechanism in Brazil. We find that access to credit for investment in individual mobility permanently increases formal employment rates and salaries, yielding an annual real rate of return of 16.94 percent over a ten-year horizon. Consistent with a geographically broader job search, we find that individuals transition to jobs further away from home and public transportation. Our results suggest that credit constraints prevent individuals from accessing parts of the labor market. As a consequence, extending credit for investment in mobility enables individuals to access geographically distant labor market opportunities, yielding high and persistent returns.
{"title":"Financial Access and Labor Market Outcomes: Evidence from Credit Lotteries","authors":"B. V. Doornik, Armando Gomes, David Schoenherr, J. Skrastins","doi":"10.2139/ssrn.3800020","DOIUrl":"https://doi.org/10.2139/ssrn.3800020","url":null,"abstract":"We assess the employment and income effects of access to credit dedicated to investment in individual mobility (a motorcycle). For identification, we exploit random time-series variation in access to credit through random lotteries for participants in a group-lending mechanism in Brazil. We find that access to credit for investment in individual mobility permanently increases formal employment rates and salaries, yielding an annual real rate of return of 16.94 percent over a ten-year horizon. Consistent with a geographically broader job search, we find that individuals transition to jobs further away from home and public transportation. Our results suggest that credit constraints prevent individuals from accessing parts of the labor market. As a consequence, extending credit for investment in mobility enables individuals to access geographically distant labor market opportunities, yielding high and persistent returns.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90942932","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 examines the impact of derivatives on bank risk and profitability, with a sample of 25 banks from developed markets during the period 2015 to 2019. The main findings suggest that banks’ use of financial derivatives has decreased bank risk. The major variables include Total Risk, Idiosyncratic Risk, and Systematic Risk. This decrease in risk can be linked to the use of derivatives, to reduce or hedge the risks involved in the bank’s operations. This study also shows that the use of financial derivatives has no significant relationship with a bank’s profitability. Overall, this study contributes to understanding the impact of derivatives use on bank risk and profitability and the consequences of a bank’s business model choice.
{"title":"A Study on The Impact of Derivatives on Bank Risk and Profitability","authors":"Rida Ahmed","doi":"10.2139/ssrn.3799045","DOIUrl":"https://doi.org/10.2139/ssrn.3799045","url":null,"abstract":"This paper examines the impact of derivatives on bank risk and profitability, with a sample of 25 banks from developed markets during the period 2015 to 2019. The main findings suggest that banks’ use of financial derivatives has decreased bank risk. The major variables include Total Risk, Idiosyncratic Risk, and Systematic Risk. This decrease in risk can be linked to the use of derivatives, to reduce or hedge the risks involved in the bank’s operations. This study also shows that the use of financial derivatives has no significant relationship with a bank’s profitability. Overall, this study contributes to understanding the impact of derivatives use on bank risk and profitability and the consequences of a bank’s business model choice.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"22 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83202769","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 examine the drivers of venture capital financing raised by eSports companies, using the CrunchBase database containing information on private and public companies receiving any type of venture capital funding worldwide. We find that companies located in Asia-Pacific and Americas attract more funding than in Europe. Venture capital funds are more likely to fund late stage and older companies, than innovative early stage and younger firms. We also observe that the founders’ previous experience plays a significant role in explaining the level of funding. Companies with at least one founder with previous eSport, managerial or start-up experience are more likely to get more funding by venture capital funds. Our research provides new evidence on how venture capital funding is allocated between late stage and early stage firms as well as between older and younger companies in the eSport-industry and in different markets.
{"title":"Venture Capital Financing in the Esports Industry","authors":"C. Niculaescu, Ivan Sangiorgi, Adrian R. Bell","doi":"10.2139/ssrn.3795142","DOIUrl":"https://doi.org/10.2139/ssrn.3795142","url":null,"abstract":"We examine the drivers of venture capital financing raised by eSports companies, using the CrunchBase database containing information on private and public companies receiving any type of venture capital funding worldwide. We find that companies located in Asia-Pacific and Americas attract more funding than in Europe. Venture capital funds are more likely to fund late stage and older companies, than innovative early stage and younger firms. We also observe that the founders’ previous experience plays a significant role in explaining the level of funding. Companies with at least one founder with previous eSport, managerial or start-up experience are more likely to get more funding by venture capital funds. Our research provides new evidence on how venture capital funding is allocated between late stage and early stage firms as well as between older and younger companies in the eSport-industry and in different markets.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"4 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79606100","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the effect of the home bias on international asset pricing by extending the core-satellite approach of active asset allocation to an equilibrium analysis. In this framework, investors combine a common core portfolio with an active investment in their home asset. In equilibrium, the core portfolio will deviate from the global market portfolio in characteristic ways, which we exploit to propose a new test of the home premium in expected returns. Unlike previous findings, our evidence suggests that the premium is almost negligible even though the home bias is substantial. This result is mainly driven by the generally high correlation of index returns and the distribution of the relative level of the home bias across countries.
{"title":"Home Bias and Expected Returns: A Structural Approach","authors":"Martin Wallmeier, C. Iseli","doi":"10.2139/ssrn.3791272","DOIUrl":"https://doi.org/10.2139/ssrn.3791272","url":null,"abstract":"We study the effect of the home bias on international asset pricing by extending the core-satellite approach of active asset allocation to an equilibrium analysis. In this framework, investors combine a common core portfolio with an active investment in their home asset. In equilibrium, the core portfolio will deviate from the global market portfolio in characteristic ways, which we exploit to propose a new test of the home premium in expected returns. Unlike previous findings, our evidence suggests that the premium is almost negligible even though the home bias is substantial. This result is mainly driven by the generally high correlation of index returns and the distribution of the relative level of the home bias across countries.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89468748","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}
Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers who simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management.
{"title":"Diverse Hedge Funds","authors":"Yan Lu, Narayan Naik, Melvyn Teo","doi":"10.2139/ssrn.3779713","DOIUrl":"https://doi.org/10.2139/ssrn.3779713","url":null,"abstract":"\u0000 Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers who simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"33 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87329350","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 estimate the disposition effect for active traders in a large discount brokerage dataset containing US households trading records between 1991 and 1996. We apply a wide framing perspective, focusing on portfolios rather than individual stocks. We find that the disposition effect varies inversely with the proportion of stocks trading at a gain in the portfolio, nearly vanishing when this proportion reaches 50%. This is driven by how the realisation of gains and losses depends on the percentage of gains in the account. The probability to realise a loss increases with the percentage of gains in the account. The relation between the probability of realising a gain and the percentage of gains in the bank account follows a U-shape. We also estimate the change in the disposition effect when an investor realises more than one stock on a trading day. We find when investors sell a stock, they are much more likely to also realise another stock on the same day. In particular, selling a loss increases an investor’s propensity to sell a gain and vice versa. This key finding provides an explanation for the observed dependency of the disposition effect on the portfolio composition. We also propose several psychological explanations for our findings.
{"title":"Wide Framing Disposition Effect: An Empirical Study","authors":"J. Brettschneider, Giovanni Burro, V. Henderson","doi":"10.2139/ssrn.3778099","DOIUrl":"https://doi.org/10.2139/ssrn.3778099","url":null,"abstract":"Abstract We estimate the disposition effect for active traders in a large discount brokerage dataset containing US households trading records between 1991 and 1996. We apply a wide framing perspective, focusing on portfolios rather than individual stocks. We find that the disposition effect varies inversely with the proportion of stocks trading at a gain in the portfolio, nearly vanishing when this proportion reaches 50%. This is driven by how the realisation of gains and losses depends on the percentage of gains in the account. The probability to realise a loss increases with the percentage of gains in the account. The relation between the probability of realising a gain and the percentage of gains in the bank account follows a U-shape. We also estimate the change in the disposition effect when an investor realises more than one stock on a trading day. We find when investors sell a stock, they are much more likely to also realise another stock on the same day. In particular, selling a loss increases an investor’s propensity to sell a gain and vice versa. This key finding provides an explanation for the observed dependency of the disposition effect on the portfolio composition. We also propose several psychological explanations for our findings.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"38 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91177796","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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