Behavioral Finance. Instructor: Sascha Baghestanian, Office: TBA. Class Times: TBA. Room: TBA.

Transcription

1 Behavioral Finance Instructor: Sascha Baghestanian, Office: TBA. Class Times: TBA. Room: TBA. Office Hours: TBA and by appointment. Room: TBA. Course Organization: The field of finance has developed a successful paradigm based on the notions that investors and managers were generally rational and the prices of securities were generally efficient. In recent years, however, theoretical and empirical research has shown this paradigm is unableto describe various features of actual financial markets. In this course we examine how the insights of behavioral/ experimental finance finance complements the traditional paradigm and sheds light on the behavior of asset prices and various Wall Street institutions and practices. Grading is as follows: Class Participation: 5% Homeworks: 45% (4 Referee reports, Problem Sets) Midterm Exam: 25% Final Exam: 25% One of the features of this field is that there is not yet any full-blown textbook. The closest thing to a textbook is A. Shleifer. Inefficient Markets: An Introduction to Behavioral Finance. Oxford, University Press, 2000 Two interesting books, which are related but not required for this course: C. Kindleberger. Manias, Panics and Crashes. Basic books, New York, 1978 G. Soros. The Alchemy of Finance. Simon and Schuster, New York, 1987 We will be reading mostly straight from the original research papers. Required readings are marked with a (*) below. The most important formal models and statistical techniques will be covered in class and reviewed in problem sets. When sitting down to read a paper on your own, try to take away the key intuition and results of the paper. Dont dwell on details. I will discuss virtually all of the articles below in class, at least briefly. The reading list also captures the structure of the course and the chronology along which the material will be covered. 1

2 Part I: Non-Behavioral Finance: (*)E. Fama, L. Fisher, M. C. Jensen, and R. R. Roll. The adjustment of stock price to new information. International Economic Review, 10:1 21, 1969 M. C. Jensen. The performance of mutual funds in the period Journal of Finance, 23: , 1968 (*)E. Fama. Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25: , 1970 Part II: Some Evidence: (*)D. J. Cutler, J. Poterba, and L. Summers. What moves stock prices? Journal of Portfolio Management, 15:4 12, 1989 G. Huberman and Tomer R. Contagious speculation and a cure for cancer: A non-event that made stock prices soar. Journal of Finance, 56: , 1970 (*)R. J. Shiller. Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review, 71: , 1981 S. F. LeRoy and R. D. Porter. The present-value relation: Tests based on implied variance bounds. Econometrica, 49: , 1981 (*)V. Smith, G. L. Suchanek, and A. Williams. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5): , 1988 (*)E. Fama and K. R. French. The cross-section of expected stock returns. Journal of Finance, 47: , 1992 J. Lakonishok and S. Seymour. Are seasonal anomalies real? a ninety-year perspective. Review of Financial Studies, 1: , 1988 V. Bernard. Stock price reactions to earnings announcement. In: Thaler, R. (Ed.), Advances in Behavioral Finance. New York: Russell Sage Foundation., 1992 J. Lakonishok, A. Shleifer, and R. Vishny. Contrarian investment, extrapolation, and risk. Journal of Finance, 49: , 1994 E. Fama and K. R. French. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33:3 56, 1993 E. Fama and K. R. French. Business conditions and expected returns on stocks and bonds. Journal of Financial Economics, 25:23 49, 1989 (*)W. F.M. De Bondt and R. Thaler. Does the stock market overreact? Journal of Finance, 40: ,

3 R. La Porta, J. Lakonishok, A. Shleifer, and R. Vishny. Good news for value stocks: Further evidence on market efficiency. Journal of Finance, 52: , 1997 A. Lo and A. MacKinlay. When are contrarian profits due to stock market overreaction? Review of Financial Studies, 3: , 1990 N. Jegadeesh and Sheridan T. Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance, 48:65 91, 1993 K. Daniel and T. Sheridan. Evidence on the characteristics of cross-sectional variation in stock returns. Journal of Finance, 52:1 33, 1997 J. Stein. Overreactions in the options market. Journal of Finance, 44: , 1989 (*) K. A. Froot and H. T. Richard. Anomalies: Foreign exchange. Journal of Economic Perspectives, 4: , 1990 R. Roll. Orange juice and weather. American Economic Review, 74: , 1984 K. E. Case and R. J. Shiller. The efficiency of the market for single-family homes. American Economic Review, 79: , 1989 Part III: Demand Side: Part IIIa: Demand By Arbitrageurs (sophisticated traders): (*)J. Wurgler and E. Zhuravskaya. Does arbitrage flatten demand curves for stocks? Journal of Business, 75: , 2002 (*)A. Shleifer. Inefficient Markets: An Introduction to Behavioral Finance. Oxford, University Press, 2000 (Chapers 1-6) G. D Avolio. The market for borrowing stock. Journal of Financial Economics, 66: , 2002 E. M. Miller. Risk, uncertainty, and divergence of opinion. Journal of Finance, 32: , 1977 J. Chen, H. Harrison, and J. C. Stein. Breadth of ownership and stock returns. Journal of Financial Economics, 66: , 2002 C. M. Jones and O. A. Lamont. Short sale constraints and stock returns. Journal of Financial Economics, 66: , 2002 O. A. Lamont and R. Thaler. Can the market add and subtract? mispricing in tech stock carve-outs. Journal of Political Economy, 111: , 2003 M. Mitchell, T. Pulvino, and E. Stafford. Limited arbitrage in equity markets. Journal of Finance, 57: ,

4 E. Ofek, M. Richardson, and R. Whitelaw. Limited arbitrage and short sales restrictions: Evidence from the options markets. Journal of Financial Economics, 57: , 2003 K. A. Froot and E. Dabora. How are stock prices affected by location of trade? Journal of Financial Economics, 53: , 1999 M. K. Brunnermeier and L. H. Pedersen. Predatory trading. Journal of Finance, 60: , 2002 M. K. Brunnermeier and S. Nagel. Hedge funds and the technology bubble. Journal of Finance, 59: , 2002 Part IIIb: Demand By Average Investors (non-sophisticated traders): L. S. Bagwell. Dutch auction repurchases: An analysis of shareholder heterogeneity. Journal of Finance, 47:71 105, 1992 B. Barber, T. Odean, and N. Zhu. Systematic noise. Journal of Financial Markets, 12: , 2009 (*)D. Kahneman and A. Tversky. Judgement under uncertainty: heuristics and biases. Science, 185: , 1974 (*)D. Kahneman. Maps of bounded rationality: Psychology for behavioral economics. American Economic Review, 93: , 2003 (*)D. Kahneman and M. Riepe. Aspects of investor psychology. Journal of Portfolio Management, 24:52 65, 1998 (*)A. Shleifer and R. Vishny. A model of investor sentiment. Journal of Financial Economics, 49: , 1998 O. A. Lamont and J. C. Stein. Aggregate short interest and market valuations. American Economic Review, 94:23 32, 2003 A. Poteshman. Underreaction, overreaction, and increasing misreaction to information in the options market. Journal of Finance, 56: , 2001 K. Daniel, D. Hirshleifer, and A. Subrahmanyam. Investor psychology and security market under- and overreactions. Journal of Finance, 53: , 1998 H. Hong and J. C. Stein. A unified theory of underreaction, momentum trading, and overreaction in asset markets. Journal of Finance, 54: , 1999 N. Barberis and A. Shleifer. Style investing. Journal of Financial Economics, 68: , 2003 N. Barberis, A. Shleifer, and J. Wurgler. Comovement. Journal of Financial Economics,

5 K. R. French and J. M. Poterba. Investor diversification and international equity markets. American Economic Review, 81: , 1991 G. Huberman. Familiarity breeds investment. Review of Financial Studies, 14: , 2001 P. Klibanoff, O. Lamont, and T. A. Wizman. Investor reaction to salient news in closedend country funds. Journal of Finance, 53: , 1998 (*)H. Shefrin and M. Statman. The disposition to sell winners too early and ride losers too long: Theory and evidence. Journal of Finance, 40: , 1985 H. Shefrin and M. Statman. Explaining investor preference for cash dividends. Journal of Financial Economics, 13: , 1984 T. Odean. Are investors reluctant to realize their losses? Journal of Finance, 53: , 1998 H. Hong, Jeffrey D. K., and J. C. Stein. Social interaction and stock-market participation. Journal of Finance, 59: , 2004 R. J. Shiller. Stock prices and social dynamics. Brookings Paper on Economic Activity, 1: , 1984 H. Hong, J. D. Kubik, and J. C. Stein. Thy neighbors portfolio: Word-of-mouth effects in the holdings and trades of money managers. Journal of Finance, 60: , 2005 (*)M. Baker and J. Wurgler. Investor sentiment and the cross-section of stock returns. Journal of Finance, 61: , 2008 Eli Ofek and Matthew Richardson. Dotcom mania: The rise and fall of internet stock prices. Journal of Finance, 58: , 2003 (*)M. Brunnermeier. Bubbles. New Palgrave Dictionary of Economics, 2008 Part IV: Experimental Economics and Finance: (*)V. Smith, G. L. Suchanek, and A. Williams. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5): , 1988 (*)M.V. Boening, S. LaMaster, and A. Williams. Price bubbles and crashes in experimental call markets. Economics Letters, 41: , 1993 A. Williams. The formation of price forecasts in experimental markets. Journal of Money, Credit, and Banking, pages 1 18, 1987 A. Williams. Price Bubbles in Large Financial Asset Markets? Handbook of Experimental Economics Results,

6 D. Porter and V. L. Smith. Futures markets and dividend uncertainty in experimental asset markets. Journal of Business, 68(4): , 1995 T. Cason. Call market efficiency with simple adaptive learning. Economics Letters, 40:27 32, 1992 G. Caginalp, D. Porter, and V. Smith. Momentum and overreaction in experimental asset markets. International Journal of Industrial Organization, 18:80 99, 2000 G. Caginalp, D. Porter, and V. Smith. Financial bubbles: Excess cash, momentum and incomplete information. The Journal of Psychology and Financial Markets, 2(2):80 99, 2001 G. Caginalp and V. Ilieva. The dynamics of trader motivations in asset bubbles. Journal of Economic Behavior and Organization, 66(3 4): , 2005 (*)M. Dufwenberg, T. Lindqvist, and E. Moore. Bubbles and experience: An experiment. American Economic Review, 95(5): , 2005 (*)R. N. Hussam, D. Porter, and V. L. Smith. Thar she blows: Can bubbles be rekindled with experienced subjects? American Economic Review, 98(3): , 2008 (*)E. Haruvy, Y. Lahav, and C. N. Noussair. Traders expectations in asset markets: Experimental evidence. American Economic Review, 97(5): , 2007 (*)E. Haruvy and C. N. Noussair. The effect of short selling on bubbles and crashes in experimental spot asset markets. Journal of Finance, 61(3): , 2006 V. Lei and F. Vesely. Market efficiency: Evidence from a no-bubble asset market experiment. Pacific Economic Review, 14(2): , 2009 M. Kirchler, J. Huber, and T. Stoeckl. Bubble measures in experimental asset markets. Experimental Economics, 13: , 2010 V. Lugovskyy, D. Puzzello, and S. Tucker. An experimental study of bubble formation in asset markets using the tatonnement trading institution (*)J. B. DeLong, A. Shleifer, L. H. Summers, and R. J. Waldman. Positive feedback investment strategies and destabilizing rational speculation. Journal of Finance, 45: , 1990 L. F. Ackert, Charupat N., Deaves R., and B. D. Kluger. The origins of bubbles in laboratory asset markets. Federal Reserve Bank of Atlanta, 6, 2006 J. Duffy and U. M. Ünver. Asset price bubbles and crashes with near-zero-intelligence traders. Economic Theory, 27: , 2006 (*)J. Duffy. Agent-Based Models and Human Subject Experiments, in: L. Tesfatsion and K.L. Judd, eds., Handbook of Computational Economics Vol. 2 Handbooks in Economics Series. Elsevier,

7 (*)S. Pouget. Adaptive traders and the design of financial markets. Journal of Finance, 62(6): , 2007 S. Moinas and S. Pouget. The bubble game: An experimental study of speculation. forthcoming: Econometrica, 2012 S. Baghestanian, D. Puzzello, and V. Lugovskyy. Trader s heterogeneity and bubble-crash patterns in experimental asset markets (*)V. Lei, C. N. Noussair, and C. R. Plott. Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality. Econometrica, 69(1): , 2001 M. Kirchler, J. Huber, and T. Stoeckl. Thar thar she bursts: Reducing confusion reduces bubbles. American Economic Review, 102(2), 2012 V. Smith, M. v. Boening, and C. Wellford. Dividend timing and behavior in laboratory asset markets. Economic Theory, 16(3): , 2000 M. Kirchler and J. Huber. The impact of instructions and procedure on reducing confusion and bubbles in experimental asset markets. Experimental Economics, 102, 2011 Part V: Supply Side: (*)O. A. Lamont and J. C. Stein. Aggregate short interest and market valuations. American Economic Review, 94:23 32, 2003 J. C. Stein. Rational capital budgeting in an irrational world. Journal of Business, 69: , 1996 J. R. Graham and C. R. Harvey. The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60: , 2001 D. Ikenberry, J. Lakonishok, and T. Vermaelen. Market underreaction to open market share repurchases. Journal of Financial Economics, 39: , 1995 D. Jenter. Market timing and managerial portfolio decisions. Journal of Finance, 60: , 2005 T. Loughran and J. Ritter. The new issues puzzle. Journal of Finance, 50:23 51, 1995 (*)M. Baker and J. Wurgler. The equity share in new issues and aggregate stock returns. Journal of Finance, 55: , 2000 B. Henderson, N. Jegadeesh, and M. S. Weisbach. World markets for raising new capital. Journal of Financial Economics, 82:63 101,

8 T. Loughran and J. Ritter. The operating performance of firms conducting seasoned equity offerings. Journal of Finance, 52: , 1997 M. Baker and J. Wurgler. Market timing and capital structure. Journal of Finance, 57:1 32, 2002 M. Baker, R. Greenwood, and J. Wurgler. The maturity of debt issues and predictable variation in bond returns. Journal of Financial Economics, 70: , 2003 S. H. Teoh, I. Welch, and T.J. Wong. Earnings management and the post-issue under performance of seasoned equity offerings. Journal of Financial Economics, 50:63 99, 1998 (*)A. Shleifer and R. Vishny. Stock market driven acquisitions. Journal of Financial Economics, 70: , 2003 D. Ming, D. Hirshleifer, S. Richardson, and S. H. Teoh. Does investor misvaluation drive the takeover market? Journal of Finance, 61: , 2006 M. J. Rau, P. R. Cooper and O. Dimitrov. A rose.com by any other name. Journal of Finance, 56: , 2001 M. Baker and J. Wurgler. A catering theory of dividends. Journal of Finance, 59: , 2004 M. Bertrand and S. Antoinette. Managing with style: The effect of managers on firm policies. Quarterly Journal of Economics, 118: , 2003 J. B. Heaton. Managerial optimism and corporate finance. Financial Management, 31:33 45, 2002 (*)U. Malmendier and G. Tate. Ceo overconfidence and corporate investment. Journal of Finance, 60: , 2005 U. Malmendier and G. Tate. Ceo overconfidence and corporate investment. Journal of Finance, 89:20 43, 2005 R. Roll. Orange juice and weather. American Economic Review, 74: ,