Behavioral finance: insights from experiments I: theory and financial markets

Duxbury, Darren

doi:10.1108/rbf-03-2015-0011

Cited by 40 publications

(31 citation statements)

References 75 publications

(126 reference statements)

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“…In a review of the experimental literature Duxbury (2015aDuxbury ( , 2015b reports on papers that also find autocorrelation is greater the the longer the existing run.…”

Section: Page14mentioning

confidence: 99%

The accuracy of spread decomposition models in capturing informed trades

Gregoriou

Rhodes

2017

RBF

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Purpose -The purpose is to examine the empirical relationship between trades undertaken by informed agents (managers) and the proxies for informed trades computed by bid-ask spread decomposition models.Design/methodology/approach -An econometric application of spread decomposition models to data from the London Stock Exchange, with an examination of whether the model predictions are co-integrated with actual outcomes.Findings -We find overwhelming evidence of non stationary behaviour between the actual and predicted informed trade prices. Our findings suggest that there is a clear need for an alternative to extant spread decomposition models perhaps incorporating findings from behavioural finance.Originality/value -Given the importance of stock market liquidity and the extensive use of spread decomposition models in predicting informed trades, we believe that the research conducted in our paper is an important contribution to the market microstructure literature.Keywords; Spread Decomposition Models, Information Asymmetry, Bid-Ask Spread, Time Series Modelling, Behavioural Finance. Paper type: Empirical paper. Page2 AbstractIn this paper we examine the empirical relationship between trades undertaken by informed agents (managers) and the proxies for informed trades computed by bid-ask spread decomposition models. Behavioural finance offers a rationale for examining the efficacy of existing approaches. We find overwhelming evidence of non stationary behaviour between the actual and predicted informed trade prices. Our results are robust to non linear speed of adjustments of stock prices, trade sizes, trading time and calendar anomalies. Our findings suggest that there is a clear need for an alternative to extant spread decomposition models. As we present evidence that spread decomposition models do not serve to adequately address observed behaviour, we suggest avenues for further research. Given the importance of stock market liquidity and the extensive use of spread decomposition models in predicting informed trades, we believe that the research conducted in our paper is an important contribution to the market microstructure literature.

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“…In a review of the experimental literature Duxbury (2015aDuxbury ( , 2015b reports on papers that also find autocorrelation is greater the the longer the existing run.…”

Section: Page14mentioning

confidence: 99%

The accuracy of spread decomposition models in capturing informed trades

Gregoriou

Rhodes

2017

RBF

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“…How investors perceive a bullish or bearish market trend is still an open question in the financial literature (for a review see Duxbury, 2015;and Muradoglu and Harvey, 2012). Traders usually form their opinions on the evaluation of short-term, mid-term and long-term financial index variations.…”

Section: How the Reference-point Influences Investor's Perception Of mentioning

confidence: 99%

Benchmark-Based Preferences Make Investors Loss Averse in Bull Markets and Gain Seeking in Bear Markets

Bordley¹,

Tibiletti²

2017

IJBM

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Recent empirical studies have shown that investors are far more likely to be loss averse during bull markets than during bear ones. The aim of this short note is to give solid foundations to this empirical evidence. Using the benchmark-based preference method we establish a direct connection between the individual perception of the market trend and the individual risk preferences. Then we develop a novel definition of loss aversion and gain seeking which intuitively captures the human attitudes described by the quotes "losses loom larger than gains" and "gains loom larger than losses", respectively. Our findings have also practical applications. In fact they may offer a solid explanation to the disposition effect. According to this cognitive bias in bull markets investors are driven by loss aversion and tend to sell winners too early; whereas in bear markets investors are driven by gain seeking and tend to hold losers too long.

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“…As was shown, in their studies, researchers attempted to identify the factors that based on a psychological approach might affect their decisions in different financial markets such as the Stock Exchange. However, the main gap in these researches stems from the lack of a comprehensive approach in examining behavioral finance; this means that researchers have examined only some of the factors which influence the behavior of investors (Huang et al, 2016;Duxbury, 2015;Kumar and Goyal, 2015;Durand et al, 2013;Muradoglu and Harvey, 2012;Olsen, 2010). Accordingly, this research is one of the first studies that, through evaluating different theories of behavioral finance, have tried to test a hybrid and relatively comprehensive model for the identification of the intended factors.…”

Section: Introductionmentioning

confidence: 99%

Empirical Analysis of the Financial Behavior of Investors with Brand Approach (Case Study: Tehran Stock Exchange)

Nouri

Motamedi

Soltani

2017

Annals of the Alexandru Ioan Cuza University - Economics

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Behavioral science in the field of finance and investment is among new topics raised in recent years. The relationship between financial sciences and other fields of social sciences such as financial psychology has caused researchers to do many researches regarding the behavior of investors in the financial markets and their reactions to different situations. Based on the theories of financial behavior, shareholders' decision to buy and sell stocks is under the influence of internal and external psychological factors. Through designing and experimental testing of the model of investors' financial behavior in the Tehran Stock Exchange with an emphasis on brand, this study was an attempt to investigate the influence of these factors. To this end, financial, psychological and social factors were considered as the most important external factors influencing the behavior of investors and, considering the mediating role of brand awareness, their impact on perceived risk and perceived return as well as investment intention was tested. The research population consisted of all individual investors in the Tehran Stock Exchange. In order to determine the sample size, considering unlimited population, Cochran formula was used and hence the sample size was determined to be 145. For data collection, standard questionnaire was used. Confirmatory factor analysis was used to test the reliability of the questionnaire and the research hypotheses were tested using path analysis. The results showed that psychological factors have a positive impact on perceived risk and returns. Financial factors had a positive impact on perceived risk but no impact on perceived return. The impact of social factors on perceived risk and perceived return was not confirmed. Moreover, the results showed that brand awareness has a moderating role in the relationship between social factors and perceived risk and return. However, its moderating role was not confirmed in the relationship between the psychological and financial factors and perceived risk and return. Perceived risk had a positive effect on attitude toward the brand. However, the impact of perceived return on attitude toward the brand was not significant. Finally, the attitude toward the brand had a positive effect on shareholders' investment intention.

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Behavioral finance: insights from experiments I: theory and financial markets

Cited by 40 publications

References 75 publications

The accuracy of spread decomposition models in capturing informed trades

The accuracy of spread decomposition models in capturing informed trades

Benchmark-Based Preferences Make Investors Loss Averse in Bull Markets and Gain Seeking in Bear Markets

Empirical Analysis of the Financial Behavior of Investors with Brand Approach (Case Study: Tehran Stock Exchange)

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