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.

scholarly journals The future of financial markets and regulation: what strategy for Europe?

foresight ◽  
2014 ◽  
Vol 16 (2) ◽  
pp. 95-108 ◽  
Author(s):  
Jean-Baptiste Gossé ◽  
Dominique Plihon
Keyword(s):  
Financial Markets ◽  
Capital Market ◽  
Financial Stability ◽  
Design Methodology ◽  
Financial Integration ◽  
Content Type ◽  
Realistic Option ◽  
The Future ◽  
Unstable Environment ◽  
Insight Into

Purpose – This article aims to provide insight into the future of financial markets and regulation in order to define what would be the best strategy for Europe. Design/methodology/approach – First the authors define the potential changes in financial markets and then the tools available for the regulator to tame them. Finally, they build five scenarios according to the main evolutions observed on the financial markets and on the tools used by the regulator to modify these trends. Findings – Among the five scenarios defined, two present highly unstable features since the regulator refuses to choose between financial opening and independently determining how to regulate finance in order to preserve financial stability. Three of them achieve financial stability. However, they are more or less efficient or feasible. In terms of market efficiency, the multi-polar scenario is the best and the fragmentation scenario is the worst, since gains of integration depend on the size of the new capital market. Regarding sovereignty of regulation, fragmentation is the best scenario and the multi-polar scenario is the worst, because it necessitates coordination at the global level which implies moving further away from respective national preferences. However, the more realistic option seems to be the regionalisation scenario: this level of coordination seems much more realistic than the global one; the market should be of sufficient size to enjoy substantial benefits of integration. Nevertheless, the “European government” might gradually increase the degree of financial integration outside Europe in line with the degree of cooperation with the rest of the world. Originality/value – Foresight studies on financial markets and regulation are quite rare. This may be explained by the difficulty to forecast what will be their evolution in the coming decades, not least because finance is fundamentally unstable. This paper provides a framework to consider what could be the best strategy of regulators in such an unstable environment.

The effect of auditor narcissism on audit market competition

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hojat Mohammadi ◽  
Mahdi Salehi ◽  
Meysam Arabzadeh ◽  
Hassan Ghodrati
Keyword(s):  
Financial Markets ◽  
Significant Relationship ◽  
Design Methodology ◽  
Audit Quality ◽  
Stock Exchange ◽  
Market Competition ◽  
Competitive Pressure ◽  
Content Type ◽  
Listed Firms ◽  
Audit Market

Purpose This paper aims to assess auditor narcissism’s effect on audit market competition (auditor concentration, clients’ concentration and competitive pressure). Design/methodology/approach This paper’s method is descriptive-correlational based on published information from listed firms on the Tehran Stock Exchange from 2012 to 2018 using a sample of 188 firms (1,310 observations). The method used for hypothesis testing is linear regression using panel data. Findings The results show a negative and significant relationship between auditor narcissism and audit market competition and its indices, including auditor concentration, clients’ concentration and competitive pressure. Moreover, a positive and significant relationship was observed between audit quality and audit market competition and its indices, including auditor concentration, client concentration and competitive pressure. Originality/value To analyzes competition indices in the audit market (auditor concentration, clients’ concentration and competitive pressure). The variable is assessed once more using the exploratory factor analysis of the so-called three variables single variable, named audit market competition. So the central question of the study is investigated within a broader sense. Moreover, as the present study is carried out in the emergent financial markets with extremely competitive audit markets to figure out the effect of auditors’ intrinsic characteristics on such markets’ competitiveness, it can provide useful information in this field.

A guide on empirical tests of the EMH

2019 ◽  
Vol 18 (2) ◽  
pp. 268-295
Author(s):  
David Peón ◽  
Manel Antelo ◽  
Anxo Calvo
Keyword(s):  
Financial Markets ◽  
Design Methodology ◽  
Recent Literature ◽  
Asset Price ◽  
Efficient Market Hypothesis ◽  
Price Formation ◽  
Content Type ◽  
Economic Fundamentals ◽  
Empirical Tests ◽  
Available Information

Purpose The efficient market hypothesis (EMH) states that asset prices in financial markets always reflect all available information about economic fundamentals. The purpose of this paper is to provide a guide as to which predictions of the EMH seem to be borne out by empirical evidence. Design/methodology/approach Rather than following the classic three groups of tests for the different forms of EMH that are common in the literature, the authors consider how the two alternative definitions of the EMH and the joint hypothesis problem impact on the tests and leave the controversy unsolved. The authors briefly report the antecedents, the main theoretical and empirical contributions and recent literature on each type of tests. Findings Eventually, as a summary for each type of tests, the authors provide a critical view on the main sources of acrimony between the alternative schools of thought in understanding asset price formation. Originality/value The paper may be seen as an up-to-date introductory review for researchers on the different tests of the EMH performed, and for newcomers to understand the key sources of acrimony between rationalists and behaviorists.

Returns and volatility spillovers among cryptocurrency portfolios

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ismail Olaleke Fasanya ◽  
Oluwatomisin Oyewole ◽  
Temitope Odudu
Keyword(s):  
Design Methodology ◽  
Asset Returns ◽  
Volatility Spillover ◽  
Content Type ◽  
Vector Autoregressive ◽  
Volatility Spillovers ◽  
Dynamic Relationship ◽  
Major Market ◽  
Daily Data ◽  
Variance Decompositions

PurposeThis paper examines the return and volatility spillovers among major cryptocurrency using daily data from 10/08/2015 to 15/04/2018.Design/methodology/approachThe authors employ the Dielbold and Yilmaz (2012) spillover approach and rolling sample analysis to capture the inherent secular and cyclical movements in the cryptocurrency market.FindingsThe authors show that there is substantial difference between the behaviour of the cryptocurrency portfolios return and volatility spillover indices over time. The authors find evidence of interdependence among cryptocurrency portfolios given the spillover indices. While the return spillover index reveals increased integration among the currency portfolios, the volatility spillover index experiences significant bursts during major market crises. Interestingly, return and volatility spillovers exhibit both trends and bursts respectively.Originality/valueThis study makes a methodological contribution by adopting Dielbold and Yilmaz (2012) approach to quantify the returns and volatility transmissions among cryptocurrencies. To the best of our knowledge, little or no study has adopted the Dielbold and Yilmaz (2012) methodology to investigate this dynamic relationship in the cryptocurrencies market. The Dielbold and Yilmaz (2012) approach provides a simple and intuitive measure of interdependence of asset returns and volatilities by exploiting the generalized vector autoregressive framework, which produces variance decompositions that are unaffected by ordering.

scholarly journals Information leaks before CEO change: financial gain and ethical cost

2020 ◽  
Vol 24 (1) ◽  
pp. 19-29
Author(s):  
Gregor Halff ◽  
Anne Gregory
Keyword(s):  
Stock Market ◽  
Financial Markets ◽  
Design Methodology ◽  
Fortune 500 ◽  
Content Type ◽  
The Public ◽  
Financial Gain ◽  
Fortune 500 Companies ◽  
Search Patterns ◽  
A Company

PurposeThe purpose of this paper is to investigate whether there are information leaks immediately before CEOs change and – if so – whether some investors take financial advantage of such prior knowledge. It thirdly investigates the ethical, practical and professional options for communication managers to deal with such situations.Design/methodology/approachWorking from sentiment theory of financial markets, the authors studied Internet search patterns for incoming CEO names and stock market movements immediately prior to the public mention or speculation of CEO change.FindingsThe authors find that in nearly a quarter of CEO changes at Fortune 500 companies, the name of the future CEO seems to have been leaked. Additionally, nearly half of those companies also experience extreme, otherwise unexplainable movements in the stock market.Originality/valueThis paper discovers the prevalence of extreme stock market movements for a company when the name of that company's next CEO has likely been leaked. Such leaks are an opportunity for unscrupulous investors, but they create ethical dilemmas for organizations. Communication managers typically respond by organizing tighter governance. However, to keep up with the speed of information and investments traveling through algorithms, organizing radical transparency could become an alternative instead.

Reversing the endowment effect by empowering buyers and sellers

2018 ◽  
Vol 52 (9/10) ◽  
pp. 1827-1844 ◽  
Author(s):  
Eugene Chan ◽  
Najam Saqib
Keyword(s):  
Boundary Conditions ◽  
Low Power ◽  
High Power ◽  
Design Methodology ◽  
Endowment Effect ◽  
Process Data ◽  
Content Type ◽  
Gift Card ◽  
Practical Implications ◽  
Potential Moderator

Purpose The endowment effect is well-established in economics, psychology and marketing where sellers place a higher value on a good than buyers. One potential moderator, namely, power is explored. The authors predicted that feeling powerful can reverse the effect, making buyers place a higher value on a good than sellers. Design/methodology/approach The authors manipulated power to assess the effects on the valuation of three different products (keychain, gift card and iPhone case). They also assessed participants’ focus on parting with the good (money), which is a loss, and receiving money (the good), which is a gain, for sellers (buyers). Findings Feelings of power reduced sellers’ prices but they increased buyers’. Crucially, the authors observed the endowment effect, but only under conditions of low power. When participants had high power, the effect reversed, with buyers placing a higher value on the good under transaction than sellers. Process data indicated that powerful buyers and sellers focused on what they gained and less on what they lost, compared to powerless buyers and sellers. Research limitations/implications The authors link the construct of power with the endowment effect, showing that the former can moderate the latter. Certainly, the endowment effect is well-established, but there are moderators and boundary conditions that warrant consideration. Practical implications The results suggest a case where the market may clear, where buyers value a consumer product more than sellers, and thus buyers would likely accept the offer made by sellers. Originality/value The authors are the first to link the power literature with the endowment effect. They also show a possible moderator for the well-established endowment effect.

Bitcoin, Litecoin, and the Euro: an annualized volatility analysis

2019 ◽  
Vol 37 (2) ◽  
pp. 229-242 ◽  
Author(s):  
Cynthia Miglietti ◽  
Zdenka Kubosova ◽  
Nicole Skulanova
Keyword(s):  
Exchange Rate ◽  
Financial Markets ◽  
Design Methodology ◽  
Daily Basis ◽  
Information Criteria ◽  
Content Type ◽  
Statistical Measures ◽  
Augmented Dickey Fuller ◽  
Volatility Analysis ◽  
Exchange Rate Changes

Purpose This paper aims to empirically investigate the volatility of Bitcoin, Litecoin and the Euro. Design/methodology/approach The authors use quantitative methodologies to assess the annualized volatility of two cryptocurrencies and one international fiat currency. The exchange rate of the currencies is monitored on a daily basis using 1,460 observations from January 1, 2014 to December 31, 2017. The models used include the augmented Dickey–Fuller test, Akaike Information Criteria, autocorrelation function and exchange rate changes determining which currency is the most volatile. Findings The findings indicate, based on the statistical measures used, including the standard deviation of selected currencies and annualized volatility, that Litecoin is more volatile than Bitcoin and the Euro and that Bitcoin is more volatile than the Euro. This furthers previous research on cryptocurrency volatility. Originality/value The paper provides compelling evidence about the volatility of Litecoin and Bitcoin. The volatility of cryptocurrencies is furthered with data that are more current. The findings are important for investors, financial markets and central banks.

Boundary-spanning and boundary-buffering in global markets

2017 ◽  
Vol 27 (2) ◽  
pp. 161-179 ◽  
Author(s):  
Mark Lehrer ◽  
Sokol Celo
Keyword(s):  
Financial Markets ◽  
Design Methodology ◽  
Family Firms ◽  
Boundary Spanning ◽  
Internationalization Process ◽  
Product Markets ◽  
Content Type ◽  
Global Capital ◽  
Firm Internationalization ◽  
Country Specific

Purpose This paper aims to provide a novel way of thinking about firm internationalization. We offer a stylized view of family firms as internationalizers who choose to engage in “boundary-spanning” across global product markets while engaging in “boundary-buffering” to insulate themselves from global financial markets. Design/methodology/approach The case of Germany, with its large stock of internationalized family firms, shows how boundary-buffering vis-à-vis global capital markets can be compatible with successful and sustained internationalization and boundary-spanning in global product markets. Statistics are supplied. Findings To compensate for the lack of resources stemming from their abstinence from global financial markets, German family firms draw on country-specific conditions favorable to the proliferation of large internationalized family firms. Insights from the German case serve to derive propositions. Originality/value The developed concept of an internationalization pathway for family firms contrasts with the much more established concept of an internationalization process for family firms. The contrast between a “pathway” and a “process” amounts to the distinction between ends and means: the internationalization pathway (as defined here) has largely to do with strategic choice, whereas the internationalization process (as defined in the literature) focuses more on barriers to internationalization and means for overcoming them.

scholarly journals An analysis of financial speculation: from the Maqasid Al-Shari’ah perspective

Humanomics ◽  
2017 ◽  
Vol 33 (1) ◽  
pp. 2-14 ◽  
Author(s):  
Ildus Rafikov ◽  
Buerhan Saiti
Keyword(s):  
Social Norms ◽  
Financial Markets ◽  
Special Reference ◽  
Foreign Exchange ◽  
Financial Crises ◽  
Design Methodology ◽  
Financial Instruments ◽  
Content Type ◽  
Financial Speculation ◽  
To Come

Purpose This paper aims to discuss the topic of financial speculation with special reference to forex and offers an analysis from the Maqasid Al-Shari’ah perspective, whereby authors propose to limit the outreach of speculative instruments in the financial markets. Design/methodology/approach The authors will make use of a simple textual analysis of existing materials and documents. To come up with conclusions, relevant to this study and to make them credible enough, the authors will undertake to review the existing literature in the next part of the paper and will later present his analysis of findings in light of financial crises and the objectives of Shari’ah. Findings The Maqasid Al-Shari’ah approach used in the analysis suggests that speculative financial instruments do not constitute a necessity, and their harmful practice must be limited to protect the religion, life, lineage, intellect and property. Originality/value Financial speculation in general and foreign exchange in particular must be regulated. Their current practices of financial system pose significant challenges for entire economies as well as individuals. Muslims should also avoid speculative financial instruments, such as forex, because they are a clear threat to individual and state wealth and prosperity. In addition, they threaten traditional businesses and social norms in Muslim societies.

Reflections on civil culpability and accountability in the destabilization of financial institutions

2010 ◽  
Vol 17 (3) ◽  
pp. 333-336
Author(s):  
Mario Serio
Keyword(s):  
Financial Markets ◽  
Financial Institutions ◽  
Design Methodology ◽  
Practical Implication ◽  
Comparative Approach ◽  
Private Law ◽  
New Approach ◽  
Content Type ◽  
The Public ◽  
Practical Implications

PurposeThe purpose of this paper is to try and trace a new itinerary in the matter of the destabilization of financial institutions, i.e. the identification of a catalogue of measures that private law can offer in order to make sure that all unlawful initiatives resulting in the loss of credibility of financial markets and prejudice to the public at large do not escape the imposition of all possible liabilities.Design/methodology/approachThe matter here applied consists of the recourse to a number of experiences deriving from European legal systems that have tackled the phenomenon of unlawful attacks on the integrity of the financial markets through individual or organized acts. This comparative approach also benefits from the scrutiny of both legislation and judicial decisions: the latter are also looked at from the perspective of legal authors.FindingsThe most striking result of the research is that the instruments provided for by the private law remedies seem to be very efficient in the contrast of unlawful practices adversely affecting financial markets: the new spirit emerging from this survey is that it is imperative to set aside all contracts and agreements aimed at creating illicit ways to make profits and hide their origins.Practical implicationsThe practical implication should be to encourage all institutions with the task of checking the good functioning of financial markets to avail themselves of the tools here described to stabilize markets and deprive illegal contracts of their ill effects: it would be most desirable if such an approach were to be taken.Originality/valueThe novelty lies in the new approach described above (practical implications).

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