737 research outputs found
An Economic Theory of Self-Control
Although many economists, most notably Strotz, have discussed dynamic inconsistency and precommitment, none have dealt directly with the essence of the problem: self-control. This paper attempts to fill that gap by modeling man as an organization. The Strotz model is recast to include the control features missing in his formulation. The organizational analogy permits us to draw on the theory of agency. We thus relate the individual's control problems with those that exist in agency relationships.
Belief heterogeneity and survival in incomplete markets
In complete markets economies (Sandroni [16]), or in economies with Pareto optimal outcomes (Blume and Easley [10]), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth
Why have asset price properties changed so little in 200 years
We first review empirical evidence that asset prices have had episodes of
large fluctuations and been inefficient for at least 200 years. We briefly
review recent theoretical results as well as the neurological basis of trend
following and finally argue that these asset price properties can be attributed
to two fundamental mechanisms that have not changed for many centuries: an
innate preference for trend following and the collective tendency to exploit as
much as possible detectable price arbitrage, which leads to destabilizing
feedback loops.Comment: 16 pages, 4 figure
Do Individual Investors Consciously Speculate on Reversals? Evidence from Leveraged Warrant Trading
Leisure and Housing Consumption after Retirement: New Evidence on the Life-Cycle Hypothesis
Analogy making and the structure of implied volatility skew
An analogy based option pricing model is put forward. If option prices are determined in accordance with the analogy model, and the Black Scholes model is used to back-out implied volatility, then the implied volatility skew arises, which flattens as time to expiry increases. The analogy based stochastic volatility and the analogy based jump diffusion models are also put forward. The analogy based stochastic volatility model generates the skew even when there is no correlation between the stock price and volatility processes, whereas, the analogy based jump diffusion model does not require asymmetric jumps for generating the skew
Sensitivity of Investor Reaction to Market Direction and Volatility: The Case of Dividend Change Announcements
This study examines whether investor reactions are sensitive to the recent direction and/or
volatility of underlying market movements. We find dividend change announcements elicit a
greater change in stock price when the nature of the news (good or bad) goes against the grain of
the recent market direction during volatile times. For example, announcements to lower
dividends elicit a significantly greater decrease in stock price when market returns have been up
and more volatile. Similarly, announcements to raise dividends tend to elicit a greater increase
in stock price when market returns have been normal or down and more volatile, although this
latter tendency lacks statistical significance. We suggest an explanation for these results that
combines the implications of a dynamic rational expectations equilibrium model with behavioral
considerations that link the responsiveness of investors to market direction and volatility.University of Kansas GRF Grant #348
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