scholarly journals The use of the recognition heuristic as an investment strategy in European stock markets

2017 ◽  
Vol 22 (43) ◽  
pp. 207-223 ◽  
Author(s):  
Júlio Lobão ◽  
Luís Pacheco ◽  
Carlos Pereira
Keyword(s):  
Financial Markets ◽  
Abnormal Returns ◽  
Investment Strategy ◽  
Google Trends ◽  
Recognition Heuristic ◽  
Monthly Basis ◽  
Content Type ◽  
Additional Information ◽  
Market Portfolio ◽  
Heuristic Strategies

Purpose People often face constraints such as a lack of time or information in taking decisions, which leads them to use heuristics. In these situations, fast and frugal rules may be useful for making adaptive decisions with fewer resources, even if it leads to suboptimal choices. When applied to financial markets, the recognition heuristic predicts that investors acquire the stocks that they are aware of, thereby inflating the price of the most recognized stocks. This paper aims to study the profitability against the market of the most recognized stocks in Europe. Design/methodology/approach In this paper, the authors perform a survey and use Google Trends to study the profitability against the market of the most recognized stocks in Europe. Findings The authors conclude that a recognition heuristic portfolio yields poorer returns than a market portfolio. In contrast, from the data collected on Google Trends, weak evidence was found that strong increases in companies monthly search volumes may lead to abnormal returns in the following month. Research limitations/implications The applied investment strategy does not account for transaction costs, which may jeopardize its profitability given the fact that it is necessary to revise the portfolio on a monthly basis. Despite the results obtained, they are useful to understanding the performance of recognition heuristic strategies over a comprehensive time horizon, and it would be interesting to depict its viability during different market conditions. This analysis could provide additional information about a preferable scenario for employing our strategies and, ultimately, enhance the profitability of recognition heuristic strategies. Practical implications Through the exhaustive analysis performed here on the recognition heuristic in the European stock market, it is possible to conclude that no evidence was found for the viability of exploring this type of strategy. In fact, the investors would always gain better returns when adopting a passive investment strategy. Therefore, it would be wise to assume that the European market presents at least a degree of efficiency where no investment would yield abnormal returns following the recognition heuristic. Originality/value The main objective of this paper is to study the performance of the recognition heuristic in the financial markets and to contribute to the knowledge in this field. Although many authors have already studied this heuristic when applied to financial markets, there is a lack of consensus in the literature.

Heuristic biases in investment decision-making and perceived market efficiency

2018 ◽  
Vol 10 (1) ◽  
pp. 85-110 ◽  
Author(s):  
Syed Zulfiqar Ali Shah ◽  
Maqsood Ahmad ◽  
Faisal Mahmood
Keyword(s):  
Financial Markets ◽  
Market Efficiency ◽  
Negative Impact ◽  
Investment Decisions ◽  
Sampling Technique ◽  
Investment Strategy ◽  
Individual Investors ◽  
Content Type ◽  
Specific Investment ◽  
The Relationship

Purpose This paper aims to clarify the mechanism by which heuristics influences the investment decisions of individual investors, actively trading on the Pakistan Stock Exchange (PSX), and the perceived efficiency of the market. Most studies focus on well-developed financial markets and very little is known about investors’ behaviour in less developed financial markets or emerging markets. The present study contributes to filling this gap in the literature. Design/methodology/approach Investors’ heuristic biases have been measured using a questionnaire, containing numerous items, including indicators of speculators, investment decisions and perceived market efficiency variables. The sample consists of 143 investors trading on the PSX. A convenient, purposively sampling technique was used for data collection. To examine the relationship between heuristic biases, investment decisions and perceived market efficiency, hypotheses were tested by using correlation and regression analysis. Findings The paper provides empirical insights into the relationship of heuristic biases, investment decisions and perceived market efficiency. The results suggest that heuristic biases (overconfidence, representativeness, availability and anchoring) have a markedly negative impact on investment decisions made by individual investors actively trading on the PSX and on perceived market efficiency. Research limitations/implications The primary limitation of the empirical review is the tiny size of the sample. A larger sample would have given more trustworthy results and could have empowered a more extensive scope of investigation. Practical implications The paper encourages investors to avoid relying on heuristics or their feelings when making investments. It provides awareness and understanding of heuristic biases in investment management, which could be very useful for decision makers and professionals in financial institutions, such as portfolio managers and traders in commercial banks, investment banks and mutual funds. This paper helps investors to select better investment tools and avoid repeating expensive errors, which occur due to heuristic biases. They can improve their performance by recognizing their biases and errors of judgment, to which we are all prone, resulting in a more efficient market. So, it is necessary to focus on a specific investment strategy to control “mental mistakes” by investors, due to heuristic biases. Originality/value The current study is the first of its kind, focusing on the link between heuristics, individual investment decisions and perceived market efficiency within the specific context of Pakistan.

Gender matters: market perception of future performance

2020 ◽  
Vol 46 (10) ◽  
pp. 1247-1262
Author(s):  
Kylie A. Braegelmann ◽  
Nacasius U. Ujah
Keyword(s):  
Financial Markets ◽  
Gender Bias ◽  
Firm Size ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Capital Allocation ◽  
Event Window ◽  
Content Type ◽  
Window Approach ◽  
Over Time

PurposeThis paper aims to revisit the extant evidence on gender bias in the market. Specifically, it revisits reaction to CEO announcements. Also, it explores whether the development of the bias over time and by firm size aligns with existing theory.Design/methodology/approachThe paper examines cumulative abnormal returns around CEO announcements from 1992 through 2016 using a modified event study methodology. This evidence shown examines market reactions over time and by firm size.FindingsFinancial markets react more favorably to male CEO announcements, with a cumulative abnormal return of 49 basis points above the reaction to their female counterparts. Moreover, the paper finds that market reaction varies over time, which may be because of the increasing proportion of female CEOs, and by firm size, which may be due to the differences in new information available to investors.Research limitations/implicationsLimitations include sample size due to the paucity of female CEO announcements. This paper does not examine the effect of industry, detailed CEO characteristics or announcement content on market reaction. In addition, using an extended event window may increase the likelihood of capturing confounding events, such as mergers or earnings announcements, which limits the interpretability of the results.Practical implicationsGender bias in financial markets creates another institutional barrier for the advancement of female professionals, as well as implies inefficient capital allocation in markets.Originality/valueThe literature in this field is still inconclusive. Furthermore, bias development over time and the effect of information on bias remain unexplored. This study aims to fill that gap; furthermore, it introduces an extended event-window approach.

Using Google Trends and Baidu Index to analyze the impacts of disaster events on company stock prices

2019 ◽  
Vol 120 (2) ◽  
pp. 350-365 ◽  
Author(s):  
Ying Liu ◽  
Geng Peng ◽  
Lanyi Hu ◽  
Jichang Dong ◽  
Qingqing Zhang
Keyword(s):  
Financial Markets ◽  
Stock Prices ◽  
Google Trends ◽  
External Information ◽  
Negative Effects ◽  
Content Type ◽  
Company Stock ◽  
Short Period ◽  
Long Time ◽  
International Investors

Purpose With the ascendance of information technology, particularly through the internet, external information sources and their impacts can be readily transferred to influence the performance of financial markets within a short period of time. The purpose of this paper is to investigate how incidents affect stock prices and volatility using vector error correction and autoregressive-generalized auto regressive conditional Heteroskedasticity models, respectively. Design/methodology/approach To characterize the investors’ responses to incidents, the authors introduce indices derived using search volumes from Google Trends and the Baidu Index. Findings The empirical results indicate that an outbreak of disasters can increase volatility temporarily, and exert significant negative effects on stock prices in a relatively long time. In addition, indices derived from different search engines show differentiation, with the Google Trends search index mainly representing international investors and appearing more significant and persistent. Originality/value This study contributes to the existing literature by incorporating open-source data to analyze how catastrophic events affect financial markets and effect persistence.

Does the short squeeze lead to market abnormality and antileverage effect? Evidence from the Gamestop case

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Evangelos Vasileiou
Keyword(s):  
Time Series ◽  
Financial Markets ◽  
Stock Returns ◽  
Empirical Evidence ◽  
Abnormal Returns ◽  
Abnormal Behavior ◽  
Garch Models ◽  
Content Type ◽  
Intraday Data ◽  
The Asymmetry

PurposeThis study examines the Gamestop (GME) short squeeze in early 2021. Using intraday data for the period 4/1/2021–5/2/2021, the author provides empirical evidence that the GME stock price exhibited abnormal behavior.Design/methodology/approachThe author uses the popular Runs test to show that the GME returns were not randomly distributed, which is an indication of a violation of the Efficient Market Hypothesis (EMH). The main objective of the paper is to provide new quantitative evidence that stock returns are abnormal when short squeeze conditions emerge. The author employs the asymmetry Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models (the Exponential GARCH (EGARCH) and the Threshold GARCH (TGARCH)) and provides evidence that an exceptional time series feature emerged during the examined period: the antileverage effect.FindingsThe results show that the GME returns were not randomly distributed during the examined period and the asymmetry GARCH models indicate that, in contrast to what the time series normally show, volatility increased when the GME prices increased.Research limitations/implicationsThis paper presents a new/alternative approach for the study of EMH and abnormal returns in financial markets. Further studies on market performance during similar short squeeze conditions should be carried out in order to obtain empirical evidence for the antileverage effect abnormality.Practical implicationsThis paper could be useful for scholars who examine the EMH in financial markets because it suggests an additional method for testing abnormalities. It also presents a useful tool that allows practitioners to monitor for indications of abnormality in the stock market during a short squeeze, since the emergence of the antileverage abnormality could function as such an indication. Additionally, the outcome of this analysis could be useful for regulators because coordination among investors is easier than ever in the Internet era and such events may happen again in the future; even under normal (not short squeeze) conditions and lead to market instability.Originality/valueThis research differs from other studies that examine the GME case because it presents a new way to quantitatively present the abnormal performance of the stock markets for reasons that could be linked with the emergence of short squeeze conditions.

Analyst’s ability, media selection and investor interests: evidence from China

2017 ◽  
Vol 7 (1) ◽  
pp. 67-84 ◽  
Author(s):  
Yugang Yin ◽  
Bin Tan
Keyword(s):  
Decision Making ◽  
Mass Media ◽  
Financial Markets ◽  
Abnormal Returns ◽  
Earnings Forecasts ◽  
Individual Investors ◽  
Content Type ◽  
Conflict Of Interests ◽  
The Impact

Purpose The purpose of this paper is to find out whether the election of star analysts leads to the conflict of interests between analysts\institutional investors and individual investors. And then, further investigate how the election results to influence the individual investors’ decision making. Design/methodology/approach Given the fact that earnings forecasts and stock ratings are the most important foundations for the investor’s investment decision, the authors investigate the relationship among the earnings forecasts, abnormal returns and the election of star analyst. This paper further analyzes the impact factors on investors’ decision. The data used in this paper for star analysts’ information, analysts’ forecast and recommendations, as well as stock performances-related data are from 2005 to 2012. Findings This paper finds that mass media cannot select analysts with high forecast accuracy, and then misleads investors. It demonstrates that the analysts with poorer forecast ability and more optimistic stock recommendations are more prone to be entitled as star analysts by mass media, and these titled star analysts tend to show a poorer performance. Therefore, the star analyst worsens investors’ cognition on analysts forecast ability and then misleads investors’ decision making. Social implications Media plays a critical role in corporate governance, information collection and diffusion and reducing the information asymmetry, however, it is good to know the role of media in financial markets from a broader perspective. Because media may also bring negative factors to the financial markets such as misguiding the investors and intensify the conflict of interests between analyst and individual investors. Originality/value This paper supports a new perspective of the role of mass media in financial market, which is different from existing studies.

Asset pricing when trading is for entertainment

2019 ◽  
Vol 11 (2) ◽  
pp. 220-264
Author(s):  
Jiang Luo ◽  
Avanidhar Subrahmanyam
Keyword(s):  
Financial Markets ◽  
Risk Premium ◽  
Design Methodology ◽  
Asset Returns ◽  
Endowment Effect ◽  
Content Type ◽  
Negative Relation ◽  
Dynamic Setting ◽  
Market Portfolio ◽  
Risk Pricing

Purpose High levels of turnover in financial markets are consistent with the notion that trading, like gambling, yields direct utility to some agents. The purpose of this paper is to show that the presence of these agents attenuates covariance risk pricing and volatility, and implies a negative relation between volume and future returns. Since psychological literature indicates that the desirability of a gamble arises from the ex ante volatility of the outcome, the authors propose that agents derive greater utility from trading more volatile stocks. These stocks earn lower average returns in equilibrium, although the risk premium on the market portfolio is positive. The authors then consider a dynamic setting where agents’ utility from trading increases when they make positive profits in earlier rounds (e.g. due to an endowment effect). This leads to “bubbles,” i.e. disproportionate jumps in asset returns as a function of past prices, higher volume in up markets relative to down markets, as well as a leverage effect, wherein down markets are followed by higher volatility than up markets. Design/methodology/approach Analytical. Findings The presence of gamblers attenuates covariance risk pricing and volatility, and implies a negative relation between volume and future returns. If gamblers prefer more volatile stocks, these stocks earn lower average returns in equilibrium. If agents’ utility from trading increases when they make positive profits in earlier rounds (e.g. to an endowment effect), this leads to higher volume and lower volatility in up markets relative to down markets. Originality/value No paper has previously modeled agents who derive direct utility from trading.

Do letters to shareholders have information content?

2019 ◽  
Vol 27 (1) ◽  
pp. 137-159 ◽  
Author(s):  
Prapaporn Kiattikulwattana
Keyword(s):  
Information Content ◽  
Abnormal Returns ◽  
Inside Information ◽  
Market Returns ◽  
Content Type ◽  
Additional Information ◽  
Unexpected Earnings ◽  
Future Performance ◽  
Incremental Information ◽  
Negative Effect

PurposeThe purpose of this paper is to investigate the information content in letters to shareholders in terms of business content, tone and types of business vocabulary.Design/methodology/approachThe study uses multiple regression models to test the information content concerning business content, tone, and types of business vocabulary in letters to shareholders. Two textual analyses in accounting research dictionaries are used. Loughran and McDonald’s (2011) dictionary is used as a scheme to identify the positive and negative words, and Kothariet al.’s (2009) dictionary is used to identify the business vocabulary.FindingsLetters to shareholders contain incremental information for investors. First, the results show that the market reacts negatively to the content of these letters. The more that business content is disclosed, the lower the abnormal returns. It can be seen that investors catch additional information from letters to shareholders. Second, investors in negative unexpected earnings firms tend to not trust the concentration of positive tone in the letters. Third, some types of business vocabulary in the letters have an influence on investors’ decisions. In addition, larger amounts of business content are seen to be negatively related to firms’ future performance.Practical implicationsDue to the effect of the content of letters to shareholders, the Securities Exchange Commission may wish to consider the results of this study before setting new disclosure regulations. Specifically, some inside information might have a negative effect on market returns.Originality/valueThe study indicates that letters to shareholders are a disclosure venue between companies and investors, where investors react to certain business vocabulary. Some business words are associated with lower future performance. Therefore, the market reacts negatively when these words are reported in the letters.

scholarly journals Fifty years of research on takeover target prediction: a historical perspective

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Abongeh Tunyi
Keyword(s):  
Historical Perspective ◽  
Abnormal Returns ◽  
Target Prediction ◽  
Investment Strategy ◽  
Future Research ◽  
Content Type ◽  
Evolution And Development ◽  
Screening Strategies ◽  
Modelling Techniques ◽  
New Research

Purpose This paper aims to review prior studies and presents a synthesis of the takeover prediction literature spanning the period 1968–2018. Design/methodology/approach The paper adopts a narrative review approach. It explores prior studies on takeover target prediction from a historical perspective, focusing on the evolution and development of the literature over the 50-year period. Findings From a historical development perspective, prior studies in the area can be partitioned into four distinct eras. Studies in the first era (1968–1985) mainly established that takeover targets share common characteristics which can be captured with financial ratios. Studies in the second era (1986–2002) developed and extended formal target prediction hypotheses. These studies concluded that it was impossible to build a successful investment strategy around takeover target prediction. Studies in the third era (2003–2009) explored similar questions using alternative modelling techniques but arrive at similar results – targets can be predicted with limited accuracy and target prediction is unlikely to lead to abnormal returns. Studies in the fourth era (2010–2018) explore implications of M&A predictability on share valuation, governance and bond prices (amongst others), but most importantly, provide some evidence that takeover prediction can lead to abnormal returns when combined with appropriate screening strategies. Originality/value This presents the first in-depth review of the literature on takeover target prediction. It highlights the development of the literature over four distinct eras and identifies several limitations, research gaps and opportunities for future research. Given the recent decline in the literature (i.e. fourth era), this study may stimulate new research in the area.

scholarly journals The impact of supply chain disruptions on stock market returns during COVID-19

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hélène Flore Nguemgaing ◽  
Ana Claudia Sant’Anna
Keyword(s):  
Supply Chain ◽  
Stock Market ◽  
Stock Returns ◽  
Abnormal Returns ◽  
Google Trends ◽  
Meat Processing ◽  
Supply Chain Disruptions ◽  
Stock Market Returns ◽  
Content Type ◽  
The Impact

PurposeHow has COVID-19 impacted meat processors' stock returns? The authors evaluate the effects of supply chain disruptions (e.g. lockdowns and COVID-19 incidences among workers) on stock market prices of meat processors during the COVID-19 pandemic.Design/methodology/approachThis study uses an event study approach to examine the disruptions from COVID-19 through events such as plant shutdowns, the pandemic announcement, lockdown dates and the first case of COVID-19 outbreaks in meat processing plants. The dataset includes S&P 500, Google Trends, financial beta and data collected for 14 US publicly traded meat processing companies.FindingsResults show that nationwide events (e.g. announcement of the pandemic) had no statistically significant impact on average abnormal returns of meat processing companies. Individually, however, firms experienced negative abnormal returns. COVID-19-related events in individual meat processing companies had a temporary negative abnormal return in the days prior to the event.Originality/valueThis study has two main contributions. First, the authors estimate the effect of COVID-19 on the returns of meat processors. Second, the authors use Google Trends to estimate the expected stock markets returns of meat processing companies. This study provides insight to investors on the behavior of industry returns from events such as outbreaks that affect human health.

scholarly journals The impact of rating classifications on stock prices of Brazilian companies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Fernanda Pagin ◽  
Matheus da Costa Gomes ◽  
Rafael Moreira Antônio ◽  
Tabajara Pimenta Júnior ◽  
Luiz Eduardo Gaio
Keyword(s):  
Decision Making ◽  
Asset Allocation ◽  
Stock Prices ◽  
Market Reaction ◽  
Investment Decision ◽  
Abnormal Returns ◽  
Investment Strategy ◽  
Market Model ◽  
Content Type ◽  
The Impact

Purpose This paper aims to identify if there is an impact of the rating announcements issued by the agencies on the returns of the stocks of Brazilian companies listed on Brasil Bolsa Balcão, from August 2002 to August 2018, identifying which types of announcement (upgrade, downgrade or the same initial classification) cause variations in prices around the date of disclosure of the rating. Design/methodology/approach The event study methodology was applied to verify the market reaction around the announcement dates in a 21-day event window (−10, +10). The market model was used to calculate the abnormal returns (ARs), and subsequently, the accumulated ARs. Findings The hypotheses tests allowed to verify that the accumulated ARs are different, before and after the three types of rating announcements (upgrades, downgrades and the same classification); in upgrades, the mean of accumulated ARs increases in the days before the event, while in downgrades, this increase occurs after the event. This paper concluded that the rating announcements have an impact on the return of stock of the Brazilian market and that the market reaction occurs most of the time before the event happens, which indicates that the market can anticipate the information contained in the changes in credit ratings. Practical implications The results have considerable implications for portfolio managers, institutional investors and traders. It facilitates investment decision-making in the face of rating classification announcements. Market participants can pay more attention to their investment strategies and asset allocation during periods of risk rating announcements. Additionally, traders can understand the form of investment strategy for superior earnings. Originality/value The importance of the study is related to the fact that the results may explain the causes of specific movements in the Brazilian financial market related to a source of information that may or may not be able to influence the decisions of the financial agents that operate in this market. The justification is centred on the idea that, for investors who somehow react to the announcements, it is relevant to understand the impact of rating classifications on companies, as access to such information allows for more conscious decision-making.

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