Behavioural Asset Pricing: Review and Synthesis:
30 Jan 2017-Journal of Interdisciplinary Economics (SAGE PublicationsSage India: New Delhi, India)-Vol. 29, Iss: 1, pp 1-31
TL;DR: In this paper, the authors present an overview of behavioral and experimental asset pricing theory, and systematically review the evolution and current development of behavioral asset pricing modalities, and present a review of the current state of the art.
Abstract: This article presents an overview of literature on behavioural and experimental asset pricing theory. We systematically review the evolution and current development of behavioural asset pricing mod...
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1,324 citations
01 Jan 2012
TL;DR: In this paper, a simple equilibrium model with liquidity risk is proposed, where a security's required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return.
Abstract: This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidityadjusted capital asset pricing model, a security s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity. r 2005 Elsevier B.V. All rights reserved.
1,156 citations
709 citations
TL;DR: In this paper, a review of research articles in the area of behavioral finance is presented, which includes behavioral patterns of individual investors, institutional investors and financial advisors, and the literature related to them.
Abstract: The purpose of this paper is to study and describe several biases in investment decision-making through the review of research articles in the area of behavioral finance. It also includes some of the analytical and foundational work and how this has progressed over the years to make behavioral finance an established and specific area of study. The study includes behavioral patterns of individual investors, institutional investors and financial advisors.,The research papers are analyzed on the basis of searching the keywords related to behavioral finance on various published journals, conference proceedings, working papers and some other published books. These papers are collected over a period of year’s right from the time when the most introductory paper was published (1979) that contributed this area a basic foundation till the most recent papers (2016). These articles are segregated into biases wise, year-wise, country-wise and author wise. All research tools that have been used by authors related to primary and secondary data have also been included into our table.,A new era of understanding of human emotions, behavior and sentiments has been started which was earlier dominated by the study of financial markets. Moreover, this area is not only attracting the, attention of academicians but also of the various corporates, financial intermediaries and entrepreneurs thus adding to its importance. The study is more inclined toward the study of individual and institutional investors and financial advisors’ investors but the behavior of intermediaries through which some of them invest should be focused upon, narrowing down population into various variables, targeting the expanding economies to reap some unexplained theories. This study has identified 17 different types of biases and also summarized in the form of tables.,The study is based on some of the most recent findings to have a quick overview of the latest work carried out in this area. So far very few extensive review papers have been published to highlight the research work in the area of behavioral finance. This study will be helpful for new researches in this field and to identify the areas where possible work can be done.,Practical implication of the research is that companies, policymakers and issuers of securities can watch out of investors’ interest before issuing securities into the market.,Under the Social Implication, investors can recognize several behavioral biases, take sound investment decisions and can also minimize their risk.,The essence of this paper is the identification of 17 types of biases and the literature related to them. The study is based on both, the literature on investment decisions and the biases in investment decision-making. Such study is less prevalent in the developing country like India. This paper does not only focus on the basic principles of behavioral finance but also explain some emerging concepts and theories of behavioral finance. Thus, the paper generates interest in the readers to find the solutions to minimize the effect of biases in decision-making.
89 citations
Cites background from "Behavioural Asset Pricing: Review a..."
...…2012), impact of level of risk undertaken (Linciano and Soccorso, 2012; Ahmed, 2014), stock market volatility (Messis and Zapranis, 2014), portfolio formation (Daly and Vo, 2013), investment performance [Social Trust (Li et al., 2016)] and asset pricing (Dash, 2016; Chandra and Thenmozhi, 2017)....
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...Charles and Kasilingam’s (2015) research shows that the behavioral bias factors like emotions, moods and heuristics can be used as a base to educate the customers of mutual funds about the strategies of investing in capital markets for avoiding unsuccessful investment decisions....
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TL;DR: A convolutional neural network based classifier is proposed to extract users’ tendencies from their comments, and the distributed lag model and the GARCH model are introduced to investigate the impact of users” tendencies on market volatility and market returns.
Abstract: The online financial community enables non-professional individual investors to express opinions, share information and even spread emotions through the Internet. This paper uses 5,178,824 comments published in an online financial community to study the users’ bullish-bearish tendencies on the stock market. To that end, we propose a convolutional neural network based classifier to extract users’ tendencies from their comments, and introduce the distributed lag model and the GARCH model to investigate the impact of users’ tendencies on market volatility and market returns. The results show that the online users’ bearish tendencies are reflected in stronger market volatility and higher market returns, and the consistency of online users’ tendencies has a positive impact on market volatility.
16 citations
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TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Abstract: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE
35,067 citations
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01 Jan 1974TL;DR: The authors described three heuristics that are employed in making judgements under uncertainty: representativeness, availability of instances or scenarios, and adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.
Abstract: This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could improve judgements and decisions in situations of uncertainty.
31,082 citations
27,773 citations
"Behavioural Asset Pricing: Review a..." refers background in this paper
...Their expectations about the market were based on their recent experiences and recently available information and such expectations might be significantly biased, defined as availability bias (Kahneman & Tversky, 1979)....
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...…identifying several behavioural biases and heuristics that potentially affect financial decision-making, as envisaged by Tversky and Kahnman (1974), Kahneman and Tversky (1979), Thaler (2000), Shiller (2003) and Shefrin (2005) among others, who took forward the arguments of rational economic…...
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TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
24,874 citations
TL;DR: In this paper, the authors present a body of positive microeconomic theory dealing with conditions of risk, which can be used to predict the behavior of capital marcets under certain conditions.
Abstract: One of the problems which has plagued thouse attempting to predict the behavior of capital marcets is the absence of a body of positive of microeconomic theory dealing with conditions of risk/ Althuogh many usefull insights can be obtaine from the traditional model of investment under conditions of certainty, the pervasive influense of risk in finansial transactions has forced those working in this area to adobt models of price behavior which are little more than assertions. A typical classroom explanation of the determinationof capital asset prices, for example, usually begins with a carefull and relatively rigorous description of the process through which individuals preferences and phisical relationship to determine an equilibrium pure interest rate. This is generally followed by the assertion that somehow a market risk-premium is also determined, with the prices of asset adjusting accordingly to account for differences of their risk.
17,922 citations