Cognitive Biases, Ambiguity Aversion and Asset Pricing in Financial Markets

2010 ◽  
Author(s):  
Elena N. Asparouhova ◽  
Peter L. Bossaerts ◽  
Jon X. Eguia ◽  
William R. Zame
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Cognitive Biases ◽  
Ambiguity Aversion

Correction Mechanisms Shall Set Us Free

2018 ◽  
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Systemic Risk ◽  
Credit Rating ◽  
Market Environment ◽  
Rating Agencies ◽  
Market Protection ◽  
Protection Mechanisms ◽  
Structural Mechanisms

Market protection mechanisms work well during calm periods, but some fail miserably during slowdowns, at just the time we need them to work. When the market environment turns inhospitable, the accelerators take over from the brakes. This article frames the issues concerning oversight mechanisms, which enabled the crisis, and structural mechanisms, which in many ways advanced it. We detail the potential for competition for clients to interfere with the objective judgment of three financial markets gatekeepers: the credit rating agencies, auditors, and asset pricing firms. Any perceived bias in the quality of gatekeeping services can undermine market confidence. We then explore regulatory and contractual shortcomings that, in the event of a downturn or crisis in confidence, can exacerbate a narrow complication. In addition to the classic lemons problems in the context of information asymmetries, the tight relationship between ratings and prices perpetuate any re-rating or repricing scenarios—they combine to create an overwhelming downward force. Serious action is required. If unattended, these shortcomings leave our economy needlessly exposed to the same crisis-era systemic risk concerns that present themselves when downturns can spiral, unrestrained, into meltdowns.

Analyzing the Influences of Passive Investment Strategies on Financial Markets via Agent-Based Modeling

2008 ◽  
pp. 224-238 ◽  
Author(s):  
Hiroshi Takahashi ◽  
Satoru Takahashi ◽  
Takao Terano
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Financial Market ◽  
Investment Strategy ◽  
Agent Based Modeling ◽  
Investment Strategies ◽  
Agent Based Model ◽  
Efficient Market ◽  
Agent Based ◽  
Price Fluctuations

This chapter develops an agent-based model to analyze microscopic and macroscopic links between investor behaviors and price fluctuations in a financial market. This analysis focuses on the effects of Passive Investment Strategy in a financial market. From the extensive analyses, we have found that (1) Passive Investment Strategy is valid in a realistic efficient market, however, it could have bad influences such as instability of market and inadequate asset pricing deviations, and (2) under certain assumptions, Passive Investment Strategy and Active Investment Strategy could coexist in a Financial Market.

scholarly journals Ambiguity Aversion and Incompleteness of Financial Markets

2001 ◽  
Vol 68 (4) ◽  
pp. 883-904 ◽  
Author(s):  
S. Mukerji ◽  
J.-M. Tallon
Keyword(s):  
Financial Markets ◽  
Ambiguity Aversion

Fact, Fiction, and the Size Effect

2018 ◽  
Keyword(s):  
Asset Pricing ◽  
Size Effect ◽  
Financial Markets ◽  
Market Efficiency ◽  
Risk Adjustment ◽  
Empirical Work ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Data Errors ◽  
Small Stock

In the earliest days of empirical work in academic finance, the size effect was the first market anomaly to challenge the standard asset pricing model and prompt debates about market efficiency. The notion that small stocks have higher average returns than large stocks, even after risk adjustment, was a path-breaking discovery, and for decades it has been taken as an unwavering fact of financial markets. In practice, the discovery of the size effect fueled a crowd of small-cap indexes and active funds to the point that the investment landscape is now segmented into large and small stock universes. However, despite its long and illustrious history in academia and its commonplace acceptance in practice, there is still confusion and debate about the size effect. We examine many claims about the size effect and aim to clarify some of the misunderstanding surrounding it by performing simple tests using publicly available data. For one, using 90+ years of U.S. data, there is no evidence of a pure size effect; moreover, it may not have existed in the first place, if not for data errors and insufficient adjustments for risk and liquidity.

Renting Balance Sheet Space: Intermediary Balance Sheet Rental Costs and the Valuation of Derivatives

2020 ◽  
Vol 33 (11) ◽  
pp. 5051-5091 ◽  
Author(s):  
Matthias Fleckenstein ◽  
Francis A Longstaff
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Balance Sheet ◽  
Futures Market ◽  
The Other ◽  
Capital Regulation ◽  
Debt Overhang ◽  
Interest Rate Futures ◽  
The Interest Rate ◽  
The Cost

Abstract A long-standing asset pricing puzzle is that the funding rates in derivatives contracts often differ from those in cash markets. We propose that the cost of renting intermediary balance sheet space may help resolve this puzzle. We study a persistent basis in what is arguably the largest derivatives market, namely, the interest rate futures market. This basis is strongly related to exogenous measures of intermediary balance sheet usage and proxies for the balance sheet costs imposed by debt overhang problems and capital regulation. These results extend to the cash derivatives bases documented in many of the other largest financial markets.

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