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Good Day Sunshine: Stock Returns and the Weather

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Good Day Sunshine: Stock Returns and the Weather

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Abstract

Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relation between morning sunshine at a country's leading stock exchange and market index stock returns that day at 26 stock exchanges internationally from 1982- 97. Sunshine is strongly positively correlated with daily stock returns. After controlling for sunshine, other weather conditions such as rain and snow are unrelated to returns. If transactions costs are assumed to be minor, it is possible to trade profitably on the weather. These results are difficult to reconcile with fully rational price-setting.

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... However, investors and other participants cannot be affected by only polluted air and should further consider the effects of good AQ. The good weather, such as sunshine, has been proved to be positively correlated with stock returns in London, Singapore, New York, and other major stock markets (13,14). As for good air quality, it would make people feel optimistic relax for future economic performance (15), and tend to risk-taking behaviors, which changes their trading activities in stock market (16)(17)(18)(19). ...
... Some studies have proved that air pollution changes investors' mood and make them do biased decisions, and finally affects the stock market (12,19,(31)(32)(33)(34). In addition, the existing literature (10,13) almost focus on the effect of air pollution on stock return in developed states and regions. Given the serious problem of air pollution more happens in undeveloped countries and regions, significant irrational character in their stock markets, and directly relationship with air quality, we are trying to examine the asymmetric effect of AQ on SR in China's health industry and offer valuable references for investors. ...
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This paper discusses the asymmetric effect of air quality (AQ) on stock returns (SR) in China's health industry through the quantile-on-quantile (QQ) regression method. Compared to prior literature, our study provides the following contributions. Government intervention, especially industrial policy, is considered a fresh and essential component of analyzing frameworks in addition to investors' physiology and psychology. Next, because of the heterogeneous responses from different industries to AQ, industrial heterogeneity is thus considered in this paper. In addition, the QQ method examines the effect of specific quantiles between variables and does not consider structural break and temporal lag effects. We obtain the following empirical results. First, the coefficients between AQ and SR in the health service and health technology industries change from positive to negative as AQ deteriorates. Second, AQ always positively influences the health business industry, but the values of the coefficients are larger in good air. In addition, different from other industries, the coefficients in the health equipment industry are negative, but the values of the coefficients change with AQ. The conclusions provide important references for investors and other market participants to avoid biased decisions due to poor AQ and pay attention to government industrial policies.
... 1 As businesses account for a substantial amount of overall economic activity, changing climatic circumstances should considerably impact the cross-section of businesses. Several studies discuss the economic impact of environmental changes on corporate behaviour (Ding et al., 2011, Huynh et al., 2020, Hirshleifer & Shumway, 2003. Extending this line of enquiry in this study, we investigate the impact of extreme rainfall deviations on the capital structure of rain-sensitive firms. ...
... In this study, we contribute to the literature that investigates the impact of climate and environmental changes on corporate behaviour. For example, a sizeable number of studies relate climate change to overall stock market returns, market sentiment, liquidity, investment strategies and volatility (Cao and Wei, 2005;Hirshleifer and Shumway, 2003;Kamstra et al., 2003;Rehse et al., 2019;Rao et al. 2022). We add to the literature on corporate climate finance by presenting causal evidence on the association between extreme rainfall conditions and corporate borrowings. ...
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We examine whether the extreme rainfall condition affects corporate borrowings. Based on the saliency argument, the findings show that extreme rain conditions induce expansion of corporate borrowing among rain-sensitive firms. We further document the heterogenous treatment effect of this rain extremities response. While the expansion of corporate borrowing is in part commensurate with the investment demands created by rain extremities, this positively shifts the risk-taking appetite of the affected firms. Our results suggest that a firm's adaptation to climate change can shift corporate risk-taking appetite. JEL Codes : D81; G30; G32; G34; G38; Q54; Q51
... Based on this background, prior studies have long observed the eects of meteorological conditions [15] with the help of various variables, such as temperature [16][17][18][19], sunlight [20][21][22][23][24][25], and rainfall [26][27][28][29][30][31]. However, weather conditions are not the only factors that aect consumer behavior. ...
... Negative emotions caused by a lack of sunlight exposure cause mood-changing behaviors, leading to a variety-seeking tendency in consumer behavior [23]. In addition, it has been reported that the amount of sunlight has an impact on the stock market as it aects the moods of consumers and investors [24,25]. Third, considering the case of rainfall, it has been observed that since bad weather reduces leisure enjoyment and consumers' willingness to go out [26], it curtails the outdoor purchasing behavior [27][28][29][30]. ...
... Exposure to questions about overdraft fees on multiple surveys led to decreased risk of overdraft fees over multiple years (11), suggesting that increased attention to behaviors that put people at risk of those fees changes behaviors in protective ways. Stock prices have been found to be influenced by the presence of sunshine during the morning hours of a trading day, presumably by making traders more optimistic (12). On the other hand, sadness, which, like other emotions, can be systematically affected by external factors (13), has been shown to levy financial costs by affecting people's decisions (14). ...
... While previous research has documented robust relationships between a tendency to consider the future and positive outcomes in important domains such as health behaviors, financial decision-making, and education choices, the tools used to measure future orientation were intended to capture a static trait of individuals, which appears to be accurate in the midterm (8). Research indicating context-specific influences on cognitive processes suggest that while there may be stable tendencies to consider the future during decision-making, there is likely temporal variation that depends on a variety of factors (10,12,14). ...
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Many choices that people face daily have implications for future health and well-being. Choices about what foods to purchase and consume are one of the most frequent—and universal choices—that people must make. The ongoing rise of overweight and obesity rates—and associated diet-related diseases—in the US and many other countries illustrates the future health consequences of low-quality dietary choices. While a large body of research shows that individuals with a tendency to consider the future make a wide range of healthier decisions, research on limited attention and exogenous factors influencing choice suggests that attention to the future consequences of choices may vary from one choice scenario to the next. In this research, we examine the impact of active consideration of future health impacts during a hypothetical online food choice experiment on the nutritional quality of food choices and on choice process variables—the set of products people choose to select from and the use of nutrition information during choice—during an online food choice task. Next, we examine the impact of exposure to a short message about the health benefits of fiber on consideration of future health impacts and on the nutritional quality of choices. We find that active consideration of future health impacts significantly improves the nutritional quality of choices—particularly among processed food products—and makes people more likely to pay attention to healthy foods and use nutrition information. Exposure to a short health message significantly increases the likelihood that individuals consider future health impacts during choice, which promotes healthier choices overall.
... However, some studies suggest that a systematic change in sentiment, associated with events seemingly unrelated to economic fundamentals, can have a significant and predictable impact on the prices of these instruments. A systematic change in investor sentiment is believed to be associated with events such as a change in the number of daylight hours (Kamstra et al., 2003), rainy days (Hirshleifer & Shumway, 2003), lunar cycles (Yuan et al., 2006), temperature (Cao & Wei, 2005) and the performance of a national sports team (Edmans et al., 2007). These can have economically significant effects on stock prices. ...
... As a result, he found that changes in sentiment related to cloud cover levels affect stock prices. Hirshleifer D. and Shumway T. (Hirshleifer & Shumway, 2003) re-ported that the sunshine effect is not limited to New York City. They documented the relationship between cloudiness and stock prices in 18 of the 26 countries studied. ...
Article
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Many recent works indicate the existence of a significant relationship between weather factors such as pressure, humidity, windspeed, sum of falls or sunshine and rates of return for stocks quoted on stock exchange. A properly conducted econometric study requires a careful analysis of the properties of the factors that will be used in the econometric model to explain the development of the dependent variable. The aim of the research is to check if the weather factors could be used as econometric regressors by verifying their statistical propensities. The analysis was held on the weather stations located in eight cities in Poland: Poznan, Kolo, Plock, Warsaw, Wroclaw, Opole, Katowice and Rzeszow. These cities host registered offices of the biggest companies of the energy sector in Poland. The research methods were focused around basic statistics and normality tests of distributions of weather factors' (four types), as well as the autocorrelation of regressors.
... Given that natural hazards affect residents' work and lives in different ways, many studies have examined the impact of natural disasters on individual and household economic behavior. Existing research found that natural disasters affect individuals' well-being (Rehdanz et al., 2015), investor sentiment (Hirshleifer and Shumway, 2003;Kamstra et al., 2003;Kaplanski and Levy, 2010), migration (Saldaña-Zorrilla and Sandberg, 2009;Warner and Afifi, 2014;Cattaneo and Peri, 2016;Pajaron and Vasquez, 2020), risk preferences (Bourdeau-Brien and Kryzanowski, 2020), mental health (Shultz, 2014;Graham et al., 2019;Zhang et al., 2022), and children's development (Rabassa et al., 2012;Deuchert and Felfe, 2015). Furthermore, studies have examined the impact of natural disasters on household income inequality (Yamamura, 2015;Abdullah et al., 2016;Keerthiratne and Tol, 2017), household savings (Filipski et al., 2019), household debt (Gallagher and Hartley, 2017), household consumption (Arndt et al., 2004;Wahdat, et al., 2021), and other household behaviors. ...
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Examining the factors that influence rural households’ wealth facilitates enhancing poor households’ happiness, improving their overall welfare, and narrowing the wealth gap between different households. Thus, this study analyzed data from the China Family Panel Survey (CFPS) using multiple linear regression and propensity score matching methods to examine the impact of natural disasters on rural household wealth. Our findings showed that natural disasters have a significant negative impact on rural household wealth, with a medium-to long-term effect. Additionally, the heterogeneity analysis indicated that natural disasters have a greater effect on the wealth of larger households and households with high-consumption levels. Mechanism results suggest that natural disasters affect rural household wealth by reducing household income and harming individual’s physical and mental health.
... Among other factors, we can mention weather and quantity of sunny days [15], results of sports events [16,17], closeness to the investor's home, which is called "home bias", and national identity of a company [2], what is more, related to investors' with not diversified portfolio [5] and those who aim at pension retirement and mostly prefer local companies [18] (table 1). However, it is essential for the long-run investment process to include a mechanism to counteract cognitive limitations and irrationality, especially about risk assessment and acceptance, which outlines the need for automated robotic consultants. ...
Chapter
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The volume of private investment is growing steadily nowadays. In this case, it is crucial to analyze investors’ behaviour, decision-making factors and the specifics of their investment portfolio formation and especially their cognitive constraints, which prevent them from effectively defining investment goals and profitable achieving them. This research shows that investors, even experienced and financially literate, often make significant mistakes when creating their own investment portfolios. Thus, the use of automated tools for determining the insurance premium and the optimal investment portfolio, which is a robo-adviser, becomes relevant. The paper presents the model for estimating personal insurance premium for different risk attitude investment portfolios using robo-advisor. Three types of investors are analyzed: conservative, aggressive, and moderately aggressive. The model helps determine the individual size of the insurance premium for each investor profile, taking into account his or her risk attitude.KeywordsRobo-advisorRisk attitudeInsurance premiumInvestment portfolio
... A healthy environment, both inside and outside of the hotel, is the main concern of customers, and includes the quality of hygiene of the food, the cleanliness of rooms, bathrooms, kitchens, and dining areas, as well as the outdoor pollution (Darko et al., 2015;Alananzeh, 2017). Researchers have found that air quality affects people's decision-making, and previous studies have shown that people's moods are affected by environmental factors such as weather conditions and air quality (Deng and Hong, 2019;Hirshleifer and Shumway, 2003;Lepori, 2016;Levy and Yagil, 2011. Online customer satisfaction and booking intentions primarily depend on tangible goods, and a polluted outdoor environment can alter the booking decisions of online customers. ...
Article
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This paper empirically analyzes the effect of the environment on hotel customer satisfaction in Southeast Asian countries, as reflected in reviews on online booking sites. The logistic regression method is applied to extract the estimations. The empirical outcomes reveal that the environment can significantly influence customer satisfaction, which means tourists are likely to maximize their satisfaction by choosing destinations that provide a good environment. In addition, room price, hotel location, and service quality can also increase customer satisfaction. Web-based customer reviews potentially affect the booking decisions of future tourists, who carefully evaluate reviewers’ comments when making decisions about accommodation. Hotel authorities in Southeast Asian countries can improve hotel service by adopting renewable energy resources, which may in turn increase the booking interest. Furthermore, customer feedback is an essential factor, and hotel authorities can improve hotel services by considering reviewers’ comments.
... Daily environmental factors such as weather and seasonality affect mood and cognitive functions (Cedeño Laurent et al., 2018;Denissen, Butalid, Penke, & van Aken, 2008;IJzerman et al., 2018;Keller et al., 2005;Lim et al., 2018), and may lead to pathological affective disorder (Elseoud et al., 2014;Kurlansik & Ibay, 2012). The effects on individuals may be small, but the collective effects may lead to broader impacts, for example, on stock markets (Hirshleifer & Shumway, 2003;Saunders, 1993). To better understand the effects of weather and seasonality on mood or cognition, it is critical to study their effects on brain functions. ...
Article
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The influences of environmental factors such as weather on the human brain are still largely unknown. A few neuroimaging studies have demonstrated seasonal effects, but were limited by their cross-sectional design or sample sizes. Most importantly, the stability of the MRI scanner has not been taken into account, which may also be affected by environments. In the current study, we analyzed longitudinal resting-state functional MRI (fMRI) data from eight individuals, where they were scanned over months to years. We applied machine learning regression to use different resting-state parameters, including the amplitude of low-frequency fluctuations (ALFF), regional homogeneity (ReHo), and functional connectivity matrix, to predict different weather and environmental parameters. For careful control, the raw EPI and the anatomical images were also used for predictions. We first found that daylight length and air temperatures could be reliably predicted with cross-validation using the resting-state parameters. However, similar prediction accuracies could also be achieved by using one frame of EPI image, and even higher accuracies could be achieved by using the segmented or raw anatomical images. Finally, the signals outside of the brain in the anatomical images and signals in phantom scans could also achieve higher prediction accuracies, suggesting that the predictability may be due to the baseline signals of the MRI scanner. After all, we did not identify detectable influences of weather on brain functions other than the influences on the baseline signals of MRI scanners. The results highlight the difficulty of studying long-term effects using MRI.
... We mainly use the quantile regression model to study the effect of drought on the conditional distribution of industry stock prices. The weather-related literature reveals that climate factors can affect stock prices by influencing investor sentiment (Kamstra et al., 2000;Hirshleifer and Shumway, 2003;Kamstra et al., 2003;Lu and Chou, 2012;Schmittmann et al., 2015) and that investor sentiment can lead to asymmetric stock price reactions (Chen et al., 2013;Ni et al., 2015). Inspired by this earlier work, we introduce the threshold regression model and find a threshold effect of investor sentiment on the relationship between drought and industry stock prices. ...
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In this study, we examine the effect of drought on industry stock prices using a balanced panel of monthly data for 15 industries classified by China Securities Regulatory Commission in 2012. By combining the results of ordinary least squares (OLS) estimation and quantile regression models, we present a comprehensive evaluation of the relationship between drought and industry stock prices. The OLS regression results generally show that drought is negatively correlated with industry stock prices. However, quantile regression reveals that the effect of drought changes from positive to negative from the lowest to the highest stock price quantile. In addition, drought resistance capacity varies by industry. We further use threshold regression to determine the effects of investor sentiment on the relationship between drought and stock prices and identify two different regimes: low sentiment and high sentiment. In the low sentiment regime, drought has a significant negative effect on industry stock prices, while in the high sentiment regime, drought has a significant positive impact on industry stock prices.
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This paper documents the environmentally induced behavioral biases in the land market and shows how buyers correct their biases by learning from repeated transactions. Using a sample of government land sales along two sides of the heating service line in China, we first show land parcels transacted in the south in the winter are associated with an average price discount of 7.1%, compared to transactions in the north where heating service is provided. We discuss three possible explanations, including projection bias, incorrect belief, and salience bias. We find adverse weather such as low temperature and extreme weather may trigger the mispricing in the absence of the heating service, lending support to the projection bias. Moreover, our empirical investigations suggest the local government, as the only land seller, responds weakly to such biases. We also provide suggestive evidence that individual buyers in the south can learn from prior experience.
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In this study, I constitute a search based COVID-19 sentiment index using Google search volume. I develop an alternative Scared COVID-19 Attitude Revealed by Eager Search (SCARES) index using the household search volume i.e. “coronavirus pandemic”, “coronavirus epidemic”, and “coronavirus outbreak” of United States (US) during the COVID-19 pandemic. Using daily data from May 1, 2020 to July 30, 2021, I find that SCARES index negatively explains stock market return and subsequent return reversals, implying that households’ increased pandemic sentiment negatively affects equity market return. Furthermore, decile regressions on characteristics-sorted portfolio returns show that SCARES index predicts the return reversals of firms that are small, less profitable, and with low investment. I also report that COVID-19 search shocks of households do not significantly predict any of the Fama-French five-factors except SMB (small-minus-big). Moreover, I use two state Markov switching model and find that structural breaks associated with pandemic phases make SCARES positively related to indices i.e. twitter based uncertainty, volatility index, economic policy uncertainty, and business condition in high volatility regime. Finally, sub-period analysis reports that, in stock market context, people start to react slowly and become relatively less responsive to the COVID-19 search keywords. The findings of this paper can assist key stakeholders in the market to carefully analyze the asset return pattern during pandemic regimes.
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We find evidence of negative returns, greater volatility, higher turnover, and lower liquidity around a tropical cyclone. Before the land warnings are issued, there is significant under-reaction by investors. Throughout the storm, market volatility increases with negative returns. This leverage effect is similarly present in liquidity before and after the storm. The abnormal returns, volatility, and activities are not related to the characteristics of the storm and exist after the weather effect and various determinants have been accounted for. These findings strongly suggest that underlying all the negative market reaction is the prevalent emotional distress, anxiety, and fear among investors evoked by the destructive and deadly forces of the storm. These negative emotions presumably are stronger when faced with stronger storms and may be managed with better preparedness. This is indeed the case given that we find evidence of more significant market reaction to moderate and severe typhoons and in the early years than in recent years.
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Weather forecasts are a rare example of public information which is, at the same time, relevant for agents' decisions and entirely exogenous for both sides of the (tourism) market. We develop a model where signals of good weather have a positive impact on accommodation prices, the effect being stronger the higher the accuracy of the forecast and the ex-ante uncertainty in weather conditions. Using data from a sea and sun destination, we estimate an augmented hedonic price model and find that results robustly support the theory. We also find that the response of prices to weather forecasts is larger for upper-scale hotels than for low- and mid-scale hotels, a result we link to the superior pricing capability of the former.
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We estimate the dynamic causal effects of consumer sentiment shocks in the US. We identify autonomous changes in survey evidence on consumer confidence using fatalities in mass shootings as an instrument. We find the instrument to be significant for an aggregate index of consumer expectations and also back up the identification scheme with micro evidence that exploits the geographical variation in mass shootings. Sentiment shocks have real macroeconomic effects. A negative sentiment shock is recessionary: It sets off a persistent decline in consumer confidence and induces a contraction in industrial production, private sector consumption, and in the labor market, while having less evident nominal effects. Finally, sentiment shocks explain a non-negligible part of the cyclical fluctuations in consumer confidence and real macroeconomic aggregates.
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This chapter discusses the rational investor, behavioral finance, neurofinance, consensus opinions, and their impacts on stock and other markets. The chapter begins with a discussion of rational investor paradigms, describing the St. Petersburg Paradox and von Neuman-Morgenstern axioms of choice. Essential findings of Prospect Theory are described, including the framing and anchoring problems, myopia, overreaction, overconfidence, and other fundamental problems in pursuing sound rational solutions to investing, and trading problems. Connections between all of these barriers to rational decision-making to finance are explored. Psychological and physiological underpinnings to such problems are offered. Relationships between irrational investors and markets, either efficient or inefficient are discussed. In this discussion, game shows, betting markets, analyst estimates, and consensus forecasts are offered as evidence that cognitively impaired investors can comprise rational markets, while information cascades and herding can lead to irrational markets.
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This paper examines whether an extreme good air quality index (GAQI) is the superior predictor of stock market returns in China based on ordinary least squares method. This GAQI index is constructed based on data series from China Stock Market & Accounting Research Database. The results demonstrate that good air quality can increase stock market returns’ forecasting accuracy more than most popular variables, thereby confirming the prediction validity of the GAQI. The GAQI further exhibits superior portfolio performance when considering different risk appetites and transaction costs, thereby revealing that risk-seeking investors use GAQI information to obtain better portfolio performance over risk-averse investors. The findings offer new insights for stock market returns’ prediction based on air quality on the condition that air quality is undeniably a sharp focus in society.
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This study investigates the unsymmetrical effect from air quality (AQ) to stock return (SR) in China’s different industries. Depending on quantile-on-quantile (QQ) test, it draws the important results in following aspects. For tourism, iron and steel, and automobile industries, their coefficient values between AQ and SR turn into negative from positive with deteriorating AQ. Conversely, the coefficients in the wind power, hydro power, thermal power, environmental protection, and medical equipment industries turn positive from negative. Some contributions are thus drawn when compared to existing literatures. Government industrial policy is regarded as an important supplement in explaining mechanism from AQ to SR, except investor sentiment. Industrial heterogeneity is seriously treated in this paper due to different industries have different responses to AQ. Besides, the QQ test is able to capture nexus between AQ and SR in specific quantiles through embedding non-parametric estimation into conventional quantile approach. Therefore, investors should avoid biased trading decisions under different air qualities. Meanwhile, government intervention is paid special attention when appearing serious air pollution.
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We apply the impression management theory and propose that firms located in more polluted areas have strong incentives to offset the negative perceptions of their local area pollution due to shareholders’ environmental concerns. In terms of dividend policy, we predict and find that location greenness (LG), a proxy for environmental image, negatively affects firms’ dividend payouts. The effect is more pronounced for firms with high information asymmetry and agency costs. The dividend payouts due to LG have a larger impact on agency cost reductions than regular dividends. Firms use dividends and social engagements as substitutes to enhance their reputation.
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Using data from Saudi Arabia, a strictly religious society, we examine how Islamic events (i.e., Ramadan, Eid‐ul‐Fitr, Eid‐ul‐Adha and Ashoura) moderate the impact of social mood (positive and negative) on herding in the stock market. We use the cross‐sectional absolute deviation (CSAD) of returns and find that investors' mood during Islamic events of Eid‐ul‐Fitr, Eid‐ul‐Adha and Ashoura significantly affects herding behaviour in the market. Our results, however, contrast with existing evidence of herding in the month of Ramadan. Overall, results are robust after controlling for market conditions (i.e., domestic and US market returns, liquidity, sentiments, and oil price volatility) and crisis events (i.e., global financial crisis and Arab Spring). Though most prior research investigates the impact of individual Islamic events on stocks as seasonal anomalies, our study contributes by jointly exploring how four key Islamic events, associated with contrasting moods, induce diverse herding patterns in the Saudi stock market.
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Investor sentiment can be the potentially crucial factor inducing herding behavior. We advocate novel proxies for investor sentiment in cryptocurrency market and define the extreme positive (negative) sentiment as euphoria (dysphoria). We find significant herding during euphoria and dysphoria. Additionally, herding magnitude appears significantly stronger during dysphoria in most of our sample periods. Counterintuitively, the impact of extreme sentiment on herding is more pronounced in large cryptocurrencies. These findings are robust to a battery of additional tests, including alternative measurements of the market return, alternative definitions of the extreme sentiment, subperiod analysis as well as the alternative proxies for investor sentiment. Taken together, our findings indicate that extreme sentiment is an important determinant of herding in cryptocurrencies.
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We draw from research that finds local weather conditions affect individuals’ belief-formation process and asset prices to investigate whether “extreme” local temperatures impact individuals’ beliefs about U.S. economic conditions (i.e., economic sentiment) and the stock returns of local firms. We combine Gallup’s U.S. Daily Poll, which provides the daily-level economic sentiment of a population-representative random sample of 1.5 million individuals, with daily weather conditions based on survey respondent location. We document that extreme local temperatures decrease individuals’ sentiment about the U.S. economy and that this decrease relates to declines in the stock returns of local firms. Further tests distinguish this extreme local temperature-sentiment effect from the effect of perceived life satisfaction on individuals’ economic sentiment, suggesting that the potential effect of extreme temperatures on individuals’ moods is not driving our results. We conclude that extreme local temperatures affect individuals’ sentiment about economic activity beyond the potential effect of temperature on firm- or local-level economic variables, with implications for stock returns.
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In Kap. 5 des Buches werden die in der Finanzwissenschaft gängigen Begründungen der Staatstätigkeit einer verhaltensökonomischen Betrachtung unterzogen. Dabei kann unter Bezug auf das Effizienzziel nicht nur gezeigt werden, wie psychologische Erkenntnisse zu ergänzenden Einsichten mit Blick auf die Bereitstellung öffentlicher Güter, die staatliche Internalisierung externer Effekte oder auch die Korrektur informationsbedingter Marktunvollkommenheiten durch den Staat führen. Zudem wird dargelegt, wie das verhaltensökonomische Konzept des asymmetrischen (libertären) Paternalismus zu einem grundlegenden Perspektivenwechsel in der finanzwissenschaftlichen Diskussion um die Bereitstellung meritorischer Güter beiträgt. Unter dem Verteilungsziel liefern darüber hinaus die Berücksichtigung sozialer Präferenzen – erklärt mit Hilfe von Verhaltensmotiven wie Altruismus oder einer Ungleichheitsaversion – ebenso wie Ergebnisse der ökonomischen Lebenszufriedenheitsforschung sowie psychologischer Untersuchungen zur Wirkung von Knappheit und Armut zusätzliche Argumente für eine Umverteilungspolitik des Staates. Unter dem Stabilisierungsziel sind es schließlich zum einen die Psychologie von Geld, Inflation und Finanzmärkten und zum anderen verhaltensökonomische Ursachen und Effekte von Arbeitslosigkeit, die zu einer Erweiterung der finanzwissenschaftlichen Perspektive in der Bewertung des staatlichen Handlungsbedarfs beitragen.
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Duygusal yeme davranışı (DYD), bireylerde olumsuz duygulardaki yoğunlukla beraber gözlemlenmektedir. Bireylerin endişe, stres, korku, yalnızlık vb. durumlarda duygusal yeme davranışının arttığı bilinmektedir. Yine mutluluk da bazı durumlarda duygusal yeme bozukluğuna yol açabilmektedir. Duygusal yeme davranışı, bireyleri olumsuz yönde etkileyebilen önemli bir yeme bozukluğudur. Duygusal yeme davranışı, obeziteye yol açabilmektedir. Duygusal yeme davranışı ile birtakım değişkenler arasındaki ilişkilerin literatürde incelendiği gözlemlenmektedir. Bu çalışmada da duygusal yeme davranışı ile finansal risk toleransı (FRT) arasındaki ilişkinin araştırılması amaçlanmaktadır. Belirtilen bu amaç doğrultusunda ilgili verilere ulaşabilme amacıyla anket çalışması gerçekleştirilmiştir. Kadınların duygusal yeme davranışı ve vücut kütle indekslerinin (VKI) finansal risk toleransını negatif yönde etkilediği tespit edilmiştir. Erkeklerin duygusal yeme davranışı finansal risk toleransını etkilemezken, vücut kütle indeksleri ise finansal risk toleransını olumlu yönde etkilemektedir.
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We examine the impact of firm‐specific investor sentiment (FSIS) on stock returns for negative and positive earnings surprises. Using a measure constructed from firm‐specific tweets, we find that FSIS has a greater impact on stock returns for negative relative to positive earnings surprises. We further show that the impact of FSIS is greater for firms whose valuation is uncertain and difficult to arbitrage. Moreover, we provide evidence of return reversals over post‐announcement periods. Our results highlight the importance of firm‐specific investor sentiment around earnings announcements. This article is protected by copyright. All rights reserved.
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In this paper, we study the impacts of dual carbon goals on asset prices in China. Using the speech of President Jinping Xi on 22 September 2020 as an event in which the dual carbon goals are formally announced, we find that stocks with green concept have superior performance in the post-event window relative to non-green stocks. In particular, a portfolio that longs green stocks and shorts non-green stocks can generate an average monthly return above 3%. The official announcement of dual carbon goals not only attracts attention of investors, resulting in higher institutional ownership and trading volume for green stocks, but also improves fundamentals for green stocks in the post-event window.
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While the general acceptance in the 1970s was that investors acted rationally, the fact that investment decisions could not be explained only with a rational approach began to come to the fore in the early 1980s. Studies conducted in this context have diversified to examine the internal and external factors on the decision-making processes of individuals on investment. Opinions on investor behavior, which are fed by social sciences such as psychology, marketing, and sociology, have revealed that many factors are effective in the decision-making process. In this context, one of the most weighted elements in the decision-making literature is emotions. Emotions, which are directly related to different environmental conditions, have shown that they are also effective in investor decisions this way. This research was conducted to examine the effect of weather conditions on investment decisions. Data on multidimensional investment elements have been collected over a wide period and their relationships with different weather conditions have been examined. As a result, it has been concluded that the most important parameters of the investments, the transaction volume, and the transaction amount, are related to the pressure, temperature, and humidity of the weather. Similarly, transaction returns were also found to be related to air temperature.
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Under commonly observed conditions, happy subjects appear to process information in a relatively passive or nonsystematic, less detailed manner and rely on peripheral cues and heuristics in judgement, whereas sad subjects appear to process in a more active or systematic, more detailed manner. Happy subjects should therefore display less accuracy on judgements that have a relatively objective accuracy criterion. Three studies were conducted to test this hypothesis. In Study 1, subjects who had training in statistics were exposed to a happy, neutral, or sad mood induction procedure. Subjects then judged the magnitude and direction of correlation coefficients associated with each of nine scatterplots. Happy subjects were least accurate and used fewest digits in their correlation estimates; sad subjects were most accurate and used most digits. In Study 2, subjects exposed to orthogonal affect and arousal mood inductions completed the correlation estimation task. To address process further, subjects provided ratings of their concentration on the task, their strategies for estimating the correlations, and explained the concept of a correlation. Happy subjects were least accurate, used fewest digits in their estimates, reported least concentration, provided least detail in their explanations of correlations, wrote least comprehensible explanations; however, they wrote most creative descriptions. Sad subjects displayed the opposite pattern. Arousal had minimal effects on all measures. In Study 3, processing strategy was directly manipulated by asking half of the subjects to think in detail while completing their correlation estimates and offering them a bonus point for good performance. The accuracy and digit effects shown in Studies 1 and 2 were replicated. Implications are discussed.
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We review how affective states moderate the impact of stereotypes in social judgment. The reported evidence suggests that stereotypes have more impact on judgments formed by individuals in a happy mood rather than sad mood, whereas the reverse holds for individuating information. We trace these effects to mood-dependent differences in processing style. Extending previous theorizing, we suggest that individuals are more likely to process new information in a bottom-up fashion when the situation is perceived as problematic, which is partially a function of being in a sad mood. In contrast, individuals are more likely to rely on pre-existing general knowledge structures when the situation is perceived as safe, which is partially a function of being in a happy mood. The available evidence indicates that the differential impact of general knowledge structures is not mediated by mood effects on processing capacity or motivation, in contrast to what previous theorizing suggested.
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reviews research on the impact of affective states on evaluative judgments, presenting evidence that is difficult to reconcile with the assumption that emotional influences on social judgment are mediated by selective recall from memory / rather, the presented research suggests that individuals frequently use their affective state at the time of judgment as a piece of information that may bear on the judgmental task, according to a "how do I feel about it" heuristic extends the informative-functions assumption to research on affective influences on decision making and problem solving, suggesting that affective states may influence the choice of processing strategies / specifically it is argued that negative affective states, which inform the organism that its current situation is problematic, foster the use of effortful, detail oriented, analytical processing strategies, whereas positive affective states foster the use of less effortful heuristic strategies (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Investigated the role of affect in judgments of risk in 4 experiments. 557 Ss were recruited on college campuses and read paragraphs modeled after newspaper reports that described fatal or nonfatal accidents or (Exp III) positive events. Ss were later asked to estimate the chances of specific fatal or nonfatal accidents happening to them and/or to the population in general. Experimental manipulations of affect induced by report of a tragic event produced a pervasive increase in Ss' estimates of the frequency of many risks and other undesirable events. Contrary to expectation, the effect was independent of the similarity between the report and the estimated risk: An account of a fatal stabbing did not increase the frequency estimate of homicide more than the estimates of unrelated risks such as natural hazards. An account of a happy event that created positive affect produced a comparable global decrease in judged frequency of risks. (12 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Investigated, in 2 experiments, whether judgments of happiness and satisfaction with one's life are influenced by mood at the time of judgment. In Exp I, moods were induced by asking 61 undergraduates for vivid descriptions of a recent happy or sad event in their lives. In Exp II, moods were induced by interviewing 84 participants on sunny or rainy days. In both experiments, Ss reported more happiness and satisfaction with their life as a whole when in a good mood than when in a bad mood. However, the negative impact of bad moods was eliminated when Ss were induced to attribute their present feelings to transient external sources irrelevant to the evaluation of their lives; but Ss who were in a good mood were not affected by misattribution manipulations. The data suggest that (a) people use their momentary affective states in making judgments of how happy and satisfied they are with their lives in general and (b) people in unpleasant affective states are more likely to search for and use information to explain their state than are people in pleasant affective states. (18 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to arrive at a decision. The authors propose an alternative theoretical perspective, the risk-as-feelings hypothesis, that highlights the role of affect experienced at the moment of decision making. Drawing on research from clinical, physiological, and other subfields of psychology, they show that emotional reactions to risky situations often diverge from cognitive assessments of those risks. When such divergence occurs, emotional reactions often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive-consequentialist terms.
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The purpose of this paper is to analyze the optimal individual behavior in acquiring information and to determine the amount of information incorporated in a stock at equilibrium, in the presence of a cost schedule in acquiring information. Our paper shows that at equilibrium the cost to acquire information that is not already incorporated in the price depends only on the representative investor's risk preferences. It follows that the marginal information costs are the same across all stocks at equilibrium even though the stock's information costs schedules may differ. This suggests that the prices of small stocks may not incorporate all publicly available information. This paper also provides empirical evidence that newspapers' publication of publicly available information can affect the stock prices.
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A person's mood may directly affect a judgment of the uncertainty of a future event. Subjective probabilities were reported by subjects in a happy, neutral, or sad mood for personal and nonpersonal events. Two moods were induced by having the subject focus on particularly happy and sad personal experiences. Large, consistent mood effects are indicated. Relative to control subjects, happy people are “optimistic;” i.e., they report higher probabilities for positive events and lower probabilities for negative events. Conversely, sad people are “pessimistic,” providing lower (higher) probabilities for positive (negative) events. Mood-state-dependent retrieval of information is indicated.
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In Study 1, college students' preferences for different brands of strawberry jams were compared with experts' ratings of the jams. Students who analyzed why they felt the way they did agreed less with the experts than students who did not. In Study 2, college students' preferences for college courses were compared with expert opinion. Some students were asked to analyze reasons; others were asked to evaluate all attributes of all courses. Both kinds of introspection caused people to make choices that, compared with control subjects', corresponded less with expert opinion. Analyzing reasons can focus people's attention on nonoptimal criteria, causing them to base their subsequent choices on these criteria. Evaluating multiple attributes can moderate people's judgments, causing them to discriminate less between the different alternatives.
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How does mood affect the way we learn about, judge, and remember characteristics of other people? This study looked at the effects of mood on impression formation and person memory. Realistic person descriptions containing positive and negative details were presented to subjects experiencing a manipulated happy or sad mood. Next, impression-formation judgments were obtained, and subjects' recall and recognition of details of the characters were assessed. Results showed that subjects spent longer learning about mood-consistent details but were faster in making mood-consistent judgments. Overall, happy subjects formed more favorable impressions and made more positive judgments than did sad subjects. Both cued recall and recognition memory were superior for mood-consistent characteristics. Positive mood had a more pronounced effect on judgments and memory than did negative mood. These findings are discussed in terms of recent theories of mood effects on cognition, and the likely implications of the results for everyday person-perception judgments are considered.
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Evidence for the role of affective states in social judgments is reviewed, and a new integrative theory, the affect infusion model (AIM), is proposed as a comprehensive explanation of these effects. The AIM, based on a multiprocess approach to social judgments, identifies 4 alternative judgmental strategies: (a) direct access, (b) motivated, (c) heuristic, and (d) substantive processing. The model predicts that the degree of affect infusion into judgments varies along a processing continuum, such that judgments requiring heuristic or substantive processing are more likely to be infused by affect than are direct access or motivated judgments. The role of target, judge, and situational variables in recruiting high- or low-infusion judgmental strategies is considered, and empirical support for the model is reviewed. The relationship between the AIM and other affect-cognition theories is discussed, and implications for future research are outlined.
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The authors tested whether happy moods increase, and sad moods decrease, reliance on general knowledge structures. Participants in happy, neutral, or sad moods listened to a "going-out-for-dinner" story. Happy participants made more intrusion errors in recognition than did sad participants, with neutral mood participants falling in between (Experiments 1 and 2). Happy participants outperformed sad ones when they performed a secondary task while listening to the story (Experiment 2), but only when the amount of script-inconsistent information was small (Experiment 3). This pattern of findings indicates higher reliance on general knowledge structures under happy rather than sad moods. It is incompatible with the assumption that happy moods decrease either cognitive capacity or processing motivation in general, which would predict impaired secondary-task performance.
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Although pleasure played a central role in early theories of decision making, it gradually became peripheral, largely because of measurement concerns. Normative theories became more mathematical, and descriptive theories emphasized cognition over emotion. In recent years, there has been a renewed interest in emotions and choice. This article examines attempts to model pleasure and pain in terms of utilities, decision weights, and counterfactual comparisons. Research on disappointment and regret has provided both empirical and theoretical insights. Many researchers now realize that the predictability of the emotions that follow from decisions is as important as the predictability of choice.
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This study examines the impact of the Indian cricket team's performance in one day international cricket matches on returns on the Indian stock market. The main conclusion of the study is that there exists an asymmetric relationship between the performance of the Indian cricket team and stock returns on the Indian stock market. While a win by the Indian cricket team has no statistically significant upward impact on stock market returns, a loss generates a significant downward movement in the stock market. When Sachin Tendulker, India's most popular cricketer, plays the size of the downward movement in returns is larger.
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We explore the connection between equity returns and sleep disruptions following daylight-savings time changes. In international markets, the average Friday-to-Monday return on daylight-savings weekends is markedly lower than expected, with a magnitude 200 to 500 percent larger than the average negative return for other weekends of the year. This ``daylight-savings anomaly'' in financial markets is consistent with desynchronosis research which has identified the effects of changes in sleep patterns on judgment, anxiety, reaction time, problem solving and accidents. This paper suggests sleep effects of daylight-savings time changes may be impacting market participants internationally.
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It is argued that emotions are lawful phenomena and thus can be described in terms of a set of laws of emotion. These laws result from the operation of emotion mechanisms that are accessible to intentional control to only a limited extent. The law of situational meaning, the law of concern, the law of reality, the laws of change, habituation and comparative feeling, and the law of hedonic asymmetry are proposed to describe emotion elicitation; the law of conservation of emotional momentum formulates emotion persistence; the law of closure expresses the modularity of emotion; and the laws of care for consequence, of lightest load, and of greatest gain pertain to emotion regulation. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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This study examines, month-by-month, the empirical relation between abnormal returns and market value of NYSE and AMEX common stocks. Evidence is provided that daily abnormal return distributions in January have large means relative to the remaining eleven months, and that the relation between abnormal returns and size is always negative and more pronounced in January than in any other month — even in years when, on average, large firms earn larger risk-adjusted returns than small firms. In particular, nearly fifty percent of the average magnitude of the ‘size effect’ over the period 1963–1979 is due to January abnormal returns. Further, more than fifty percent of the January premium is attributable to large abnormal returns during the first week of trading in the year, particularly on the first trading day.
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By October 1996, the value of the S&P 500 Index futures contract had grown to five times its value at its inception in April 1982. One way to make the contract more accessible to small investors and to smooth out trading is to split the contract. Splitting the contract could increase transaction costs, although competition would probably limit the amount of the increase. Less clear is the need for increasing the minimum percentage tick size. The current minimum tick size is small for S&P 500 futures compared with that of other futures and also common stocks. The larger tick size could affect volume, however, by increasing trading costs and reducing the willingness to trade.
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Statement of Financial Accounting Standards (SFAS) No. 130 requires companies to report comprehensive income in a primary financial statement, but allows its presentation in either a statement of comprehensive income or a statement of stockholders' equity (Financial Accounting Standards Board [FASB] 1997). In an experiment, we examine whether and how alternative presentation formats affect nonprofessional investors' processing of comprehensive-income information, specifically, information disclosing the volatility of unrealized gains on available-for-sale marketable securities. The results show that nonprofessional investors' judgments of corporate and management performance reflect the volatility of comprehensive income only when it is presented in a statement of comprehensive income. We provide evidence consistent with our psychology-based framework that these findings occur because format affects how nonprofessional investors weight comprehensive-income information and not whether they acquire this information or how they evaluate it.
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Emotions can be regarded as the manifestations of a system that realises multiple concerns and operates in an uncertain environment. Taking the concern realisation function as a starting point, it is argued that the major phenomena of emotion follow from considerations of what properties a subsystem implementing that function should have. The major phenomena are: the existence of the feelings of pleasure and pain, the importance of cognitive or appraisal variables, the presence of innate, pre-programmed behaviours as well as of complex constructed plans for achieving emotion goals, and the occurrence of behavioural interruption, disturbance and impulse-like priority of emotional goals. The system properties underlying these phenomena are facilities for relevance detection of events with regard to the multiple concerns, availability of relevance signals that can be recognised by the action system, and facilities for control precedence, or flexible goal priority ordering and shift.A computer program, ACRES, is described that is built upon the specifications provided by this emotion theory. It operates in an operator-machine interaction involving the task of executing a knowledge manipulation task (the knowledge domain happens to be about emotions). ACRES responds emotionally when one of his concerns (e.g. errorless input, being kept busy, receiving varied input, not being killed) is touched upon. Responses are social signals, shifts in resource allocations to the operator, interruption of current task-directed processing, and refusal to accept instructions. His flow of behaviour shows much of the preference-based predictability, response interference, goalshifts, and social signalling of human and animal emotional behaviour.
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Emotions are mental states of readiness that arise from appraisals of events or one’s own thoughts. In this article, the authors discuss the differentiation of emotions from affect, moods, and attitudes, and outline an appraisal theory of emotions. Next, various measurement issues are considered. This is followed by an analysis of the role of arousal in emotions. Emotions as markers, mediators, and moderators of consumer responses are then analyzed. The authors turn next to the influence of emotions on cognitive processes, which is followed by a study of the implications of emotions for volitions, goal-directed behavior, and decisions to help. Emotions and customer satisfaction are briefly explored, too. The article closes with a number of questions for future research.
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There is a widespread concern among practitioners and corporate managers that transactions which result in changes in future earnings-per-share ("EPS") have real effects on stock prices, irrespective of whether these changes reflect differences in future cash flows. As a result, investment decisions are often conditioned on their being accretive to EPS. This paper addresses this notion by testing whether there is any relation between EPS accretion and both announcement and long-term abnormal returns for acquiring firms in mergers and acquisitions. Using a sample of 224 transactions completed between 1975 and 1994, and a measure of EPS accretion designed to exclude the real effects of any potential synergies from the acquisition, I find that EPS accretion has a positive and statistically significant effect on acquirer abnormal performance, both at announcement and for the period up to 18 months following completion of the deal. This effect is robust across different measures of abnormal performance, and after controlling for other factors known to affect the long-term performance of acquiring firms. Also, the magnitude of the effect is higher for firms with a larger percentage of unsophisticated investors. On the other hand, the estimated effect, although reliably positive, is one order of magnitude smaller than implied by practitioners' views, suggesting that the concerns expressed by managers are largely exaggerated.
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Previous papers on intraday and interday stock transactions have documented a variety of systematic patterns in spreads, volumes, returns, and returns volatility. Several theoretical models have also been proposed to explain the observed patterns, but none have fully explained the movement of returns during the course of the day. In this paper, I consider a mechanism by which intraday returns may vary in a systematic manner as a result of behavioral factors rooted in the psychology of depression. By surveying past studies in finance, I find evidence consistent with a close relationship between intradaily variation in human sentiment and patterns in intraday stock returns. In exploring this explanation, I find hourly returns do not follow the U-shaped pattern conventionally believed to hold for intraday returns. Instead, I find returns in the morning significantly exceed those in the afternoon across a variety of time periods and datasets, a novel discovery consistent with the behavioral explanation of returns.
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The AICPA Special Committee on Financial Reporting has urged disclosure of relevant forward-looking information on risks and opportunities to supplement conventional financial statements. We conduct a laboratory market experiment to assess the effects of such disclosures on capital allocation decisions. We develop two sets of competing hypotheses regarding how capital markets react to supplemental disclosures. One set is based on the assumption of semi-strong market efficiency, while the other posits that the bounded rationality of individual traders leads to inefficient market prices. We find that explicit disclosure of management’s best estimate of an uncertain quantity improves market efficiency, even though this disclosure is redundant with information in financial statements. Second, we find disclosure of an upper bound of management’s estimate has the potential to bias security prices upward, while informationally equivalent disclosure of both upper and lower bounds removes this bias. These results suggest that experimental market reactions to these supplemental disclosures are inconsistent with market efficiency. Supplemental analyses of individuals’ price predictions and trading behavior support our conclusion that inefficiencies are at least partially attributable to individual information processing biases.
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We document a striking positive stock price reaction to the announcement of corporate name changes to Internet-related dotcom names. This “dotcom” effect produces cumulative abnormal returns on the order of 74 percent for the 10 days surrounding the announcement day. The effect does not appear to be transitory; there is no evidence of a postannouncement negative drift. The announcement day effect is also similar across all firms, regardless of the firm’s level of involvement with the Internet. A mere association with the Internet seems enough to provide a firm with a large and permanent value increase.
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This paper focuses on the potential effects of small fluctuations in investors’ subjective preferences (specifically, their discount factors and attitudes towards risk) on the volatility of equity prices. We briefly summarize some of the arguments and evidence regarding the fluctuations in subjective preferences. Our analysis indicates that such fluctuations may have significant implications for understanding the volatility of the prices of financial assets.We derive a closed-form expression for equilibrium equity prices, and use this expression to map the fluctuations in investors’ subjective preferences to the fluctuations in equity prices. Our analysis suggests that small fluctuations in the discount factor have potentially large effects on the latter. For example, if the standard deviation of the fluctuations in the discount factor is of the order of 1/10th of one percent, then this by itself can induce a 3–4% standard deviation in the fluctuations in equity prices. The fluctuations in the attitude towards risk have a smaller, but nevertheless non-negligible effect. We present the intuition underlying our conclusions.
Article
This paper introduces a theoretical framework that describes the importance of affect in guiding judgments and decisions. As used here, “affect” means the specific quality of “goodness” or “badness” (i) experienced as a feeling state (with or without consciousness) and (ii) demarcating a positive or negative quality of a stimulus. Affective responses occur rapidly and automatically—note how quickly you sense the feelings associated with the stimulus word “treasure” or the word “hate”. We argue that reliance on such feelings can be characterized as “the affect heuristic”. In this paper we trace the development of the affect heuristic across a variety of research paths followed by ourselves and many others. We also discuss some of the important practical implications resulting from ways that this heuristic impacts our daily lives.
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This paper uses recent experimental studies of financial accounting to illustrate our view of how such experiments can be conducted successfully. Rather than provide an exhaustive review of the literature, we focus on how particular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of financial accounting settings influence behavior. We first describe how changes in views of market efficiency, reliance on the experimentalist’s comparative advantage, new theories, and a focus on key institutional features have allowed researchers to overcome the criticisms of earlier financial accounting experiments. We then describe how specific streams of experimental financial accounting research have addressed questions about financial communication between managers, auditors, information intermediaries, and investors, and indicate how future research can extend those streams. We focus particularly on (1) how managers and auditors report information; (2) how users of financial information interpret those reports; (3) how individual decisions affect market behavior; and (4) how strategic interactions between information reporters and users can affect market outcomes. Our examples include and integrate experiments that fall into both the “behavioral” and “experimental economics” literatures in accounting. Finally, we discuss how experiments can be designed to be both effective and efficient.
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A Sunday New York Times article on a potential development of new cancer-curing drugs caused EntreMed's stock price to rise from 12.063 at the Friday close, to open at 85 and close near 52 on Monday. It closed above 30 in the three following weeks. The enthusiasm spilled over to other biotechnology stocks. The potential breakthrough in cancer research already had been reported, however, in the journal Nature, and in various popular newspapers (including the Times) more than five months earlier. Thus, enthusiastic public attention induced a permanent rise in share prices, even though no genuinely new information had been presented.
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Motivated by the recent flurry of activity in sleep research, this paper explores the connection between sleep disruptions following Spring and Fall clock shifts associated with daylight-savings time, and equity returns. It is shown that the "weekend effect" in the form of the lower-than-expected Friday-to Monday returns is particularly pronounced for the two weekends involving daylight-savings clock changes.
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We examine the hypothesis that sentimental bettors can affect the path of prices in football betting markets. We hypothesize that sentimental traders follow the advice of false experts, believe excessively in momentum strategies, bet excessively on teams that are well known and covered in the media. We generate proxies for these sources of sentiment and show that point spreads move predictably over the course of the week, partially in response to variables known prior to the opening of betting. We show that a betting strategy of betting against the predicted movement in the point spread is borderline profitable. Copyright 1999 by University of Chicago Press.
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People exaggerate the degree to which their future tastes will resemble their current tastes. We present evidence from a variety of domains which demonstrates the prevalence of such projection bias, develop a formal model of it, and use this model to demonstrate its importance in economic environments. We show that, when people exhibit habit formation, projection bias leads people to consume too much early in life, and to decide, as time passes, to consume more-and save less-than originally planned. Projection bias can also lead to misguided purchases of durable goods. We discuss a number of additional applications and implications. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
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Two studies investigated the effect of good mood on cognitive processes. In the first study, conducted in a shopping mall, a positive feeling state was induced by giving subjects a free gift, and good mood, thus induced, was found to improve subjects' evaluations of the performance and service records of products they owned. In the second study, in which affect was induced by having subjects win or lose a computer game in a laboratory setting, subjects who had won the game were found to be better able to recall positive material in memory. The results of the two studies are discussed in terms of the effect that feelings have on accessibility of cognitions. In addition, the nature of affect and the relationship between good mood and behavior (such as helping) are discussed in terms of this proposed cognitive process.
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In this report, cases were described in whom travelling south induced hypomania, and it is perhaps surprising, therefore, that cases of rapid cycling bipolar disorder have not been reported in response to fluctuations in hours of daily sunlight
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Since the turn of the century, there have been numerous publications on the seasonality of suicide. Rarely has the duration of sunlight exposure or any other weather parameter been quantitated in studies of suicide seasonality. To explore the relationships between sunlight and suicide, we examined California weather and suicide data from 1968 to 1977. Los Angeles County and Sacramento County were well-suited to the investigation, as complete data were available for these large population centers. There was no evidence of seasonality to suicides in L.A. County or Sacramento, despite a pronounced seasonality to weather. To investigate the acute temporal effects of weather on suicides, all occurrences of 10 successive above- or below-average sunshine days were identified. Suicides of for intervals of 5 days were then compared by Mann-Whitney analyses for 25 days after the selected intervals. For L.A. County, there were no significant findings. For Sacramento County, however, there was evidence for sunlight inhibition of suicides at days 21-25 after the above-average sunshine. Suicides after 10 days of below-average sunshine were increased as much as 70% about the 10-year average. Further replication studies with larger data sets are needed for an adequate examination of the correspondences of suicide data and weather measurements.
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We use futures transaction data to investigate cross-sectional relationships between market-maker inventory positions and trade activity. The investigation documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control models are contradicted by our data. These inventory models predict that market-maker reservation prices are negatively influenced by inventory. Surprisingly, our evidence shows, as a strong and consistent empirical regularity, that correlations between inventory and reservation prices are positive. We interpret the evidence as consistent with active position taking by futures market floor traders.
Article
We examine security analysts' career concerns by relating their earnings forecasts to job separations. Relatively accurate forecasters are more likely to experience favorable career outcomes like moving up to a high-status brokerage house. Controlling for accuracy, analysts who are optimistic relative to the consensus are more likely to experience favorable job separations. For analysts who cover stocks underwritten by their houses, job separations depend less on accuracy and more on optimism. Job separations were less sensitive to accuracy and more sensitive to optimism during the recent stock market mania. Brokerage houses apparently reward optimistic analysts who promote stocks. Copyright 2003 by the American Finance Association.
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This paper presents an exact finite-sample statistical procedure for testing hypotheses about the weights of mean-variance efficient portfolios. The estimation and inference procedures on efficient portfolio weights are performed in the same way as for the coefficients in an OLS regression. OLS "t"- and "F"-statistics can be used for tests on efficient weights, and when returns are multivariate normal, these statistics have exact "t" and "F" distributions in a finite sample. Using 20 years of data on 11 country stock indexes, we find that the sampling error in estimates of the weights of a global efficient portfolio is large. Copyright The American Finance Association 1999.
Article
This paper explores the consequences of cognitive dissonance, coupled with time-inconsistent preferences, in an intertemporal decision problem with two distinct goals: acting decisively on early information (vision) and adjusting flexibly to late information (flexibility). The decision maker considered here is capable of manipulating information to serve her self-interests, but a tradeoff between distorted beliefs and distorted actions constrains the extent of information manipulation. Building on this tradeoff, the present model provides a unified framework to account for the conformity bias (excessive reliance on precedents) and the confirmatory bias (excessive attachment to initial perceptions).
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This paper examines the comovement of stocks with similar ticker symbols. For one such pair of firms, there is a significant correlation between returns, volume, and volatility at short frequencies. Deviations from "fundamental value" tend to be reversed within several days, although there is some evidence that the return comovement persists for longer horizons. Arbitrageurs appear to be limited in their ability to eliminate these deviations from fundamentals. This anomaly allows the observation of noise traders and their effect on stock prices independent of changes in information and expectations. Copyright The American Finance Association 2001.
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We use panel data on prices and net asset values to test whether dramatic country-specific news affects the response of closed-end country fund prices to asset value. In a typical week, prices underreact to changes in fundamentals; the (short-run) elasticity of price with respect to asset value is significantly less than one. In weeks with news appearing on the front page of "The New York Times", prices react much more; the elasticity of price with respect to asset value is closer to one. These results are consistent with the hypothesis that news events lead some investors to react more quickly. Copyright The American Finance Association 1998.
Article
The key idea of rational expectations models is to assume that people know (or behave as if they know) the true model that describes the economy. However, popular economic models (the models that are used by the broad masses of economic actors to form their expectations) are obviously not the same as those held by economists. This paper reports on data collection effort on popular models, using questionnaire survey methods, with the purpose of understanding speculative markets. I will report here on my research to understand the U.S. stock market crash of October 1987; research Fumiko Konya, Yoshiro Tsutsui, and I undertook to understand the Japanese stock market crash of October 1987; research Karl Case and I undertook to understand recent real estate booms; and research John Pound and I undertook to understand the periodic “hot” markets for initial public offerings (IPO's) of common stock.
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Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.