Behavioral Finance Research Paper Topics
Terrie F. and Bradley M. Bloom Associate Professor of Business Administration
George Gund Professor of Finance and Banking
Unit Head, Finance
David E. Bell
George M. Moffett Professor of Agriculture and Business
Senior Associate Dean for Faculty Strategy and Recruiting
Unit Head, Marketing
Jerry R. Green
David A. Wells Professor of Political Economy, John Leverett Professor in the University
Baker Foundation Professor, Royal Little Professor of Business Administration, Emeritus
David A. Moss
Paul Whiton Cherington Professor of Business Administration
Luis M. Viceira
George E. Bates Professor
Senior Associate Dean, Executive Education
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ADVANCED TOPICS IN FINANCE:BEHAVIOURAL FINANCE SPRING 2003
Ph D Course, Winter-Spring of 2003.
Updated March 7, 2003
The course is expected to be taught in Winter-Spring of 2003 This is reading course, so no precise schedule will exist...
· The required reading assignment for each session consists of one journal article. Students are expected to have carefully read the article marked by double star (**).
· Each student should present 3 articles and do 3 referee presentations (a critique of an article presented by another student). The presentations should be deep enough to give the audience the understanding of (a) what is research question? (b) what is in the toolbox? (c)were the issues addressed? and (c) any tricks?
· Prerequisites are Finance I and Finance II.
· In order to obtain credit, you should do presentations/discussions (see above) and either do a term paper or small empirical project.
· I hope that the project can lead to some research ideas that can be used in your thesis.
· Most of the papers are available electronically either from HHS library web site or from www.ssrn.com. If you cannot find some paper, please let me know.
· I do not expect all the topics to be covered. However, the reading list will provide you with some starting points in your future reading if you desire to do it on your own.
**- Important paper (does not mean that the rest is not important!!!)
*** - Papers we are going to discuss in class
Assistant Professor Andrei Simonov
Department of Finance, Stockholm School of Economics
Room 677, Tel: 736 9159, e-mail Andrei Simonov
Department of Finance, Stockholm School of Economics
Room 665, Tel: 736 9140, e-mail Marita Rosing
Shleifer, Andrei (2000), Inefficient Markets: An Introduction to Behavioral Finance, Oxford University Press.
Shefrin, Hersh (1999), Beyond Fear and Greed, Harvard Business School Press.
Shiller, Robert (2000), Irrational Exuberance, Princeton University Press.
* De Bondt, Werner, and Richard Thaler (1995), “Financial Decision Making in Markets and Firms”, in Jarrow, Maksimovic, and Ziemba (eds.) Finance, Elsevier-North Holland.
** Shiller, Robert (1984), “Stock Prices and Social Dynamics”, Brookings Papers on Economic Activity 2, 457-498.
BEHAVIORAL BIASES AND LACK OF RATIONALITY
Session 1: Limits to Arbitrage
***DeLong, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert Waldmann, "Noise Trader Risk in Financial Markets", Journal of Political Economy 98, 703-738
* Lamont, Owen, and Richard Thaler (2000), “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs,” Working Paper, University of Chicago.
***Shleifer, Andrei, and Robert Vishny (1997), “Limits of Arbitrage”,Journal of Finance 52, 35-55
***Shleifer, Andrei (1986), “Do Demand Curves for Stocks Slope Down?”Journal of Finance 41, 579-90.
Session 2: Evidence of Limited Arbitrage
Monday, March 31, 13.15-14.45 room 350
***Baker, Malcolm, and Savasoglu, Serkan, 2002, “Limited Arbitrage in Mergers and Acquisitions,”Journal of Financial Economics, Vol. 64(1), 91-115.
*** Froot, Kenneth and Emil Dabora, 1999,“How are stock prices affected by the location of trade,”Journal of Financial Economics, Vol. 53 (2), 189-216.
Greenwood, Robin, 2002, “Large Events and Limited Arbitrage: Evidence from a Japanese Stock Index Redefinition, ” Harvard University mimeo.
Morck, Randall and Fan Yang, 2001, “The Mysterious Growing Value of S&P 500 Membership,”University of Alberta mimeo.
***Mitchell, Mark, Todd Pulvino, and Erik Stafford, 2002, “Limited Arbitrage in Equity Markets,”Journal of Finance, Vol 57(2).
**Pontiff, Jeff (1996), “Costly Arbitrage: Evidence from Closed-end funds”, Quarterly Journal of Economics 111, 1135-52.
* Rashes, Michael, 2001, “Massively Confused Investors Making Conspicuously Ignorant Choices MCI-MCIC),”Journal of Finance, Vol 56(5), 1911-1927.
Scholes, Myron, 2000, “Crisis and Risk Management”AEA Papers and Proceedings, Vol. 90(2)
* Wurgler, Jeffrey, and Ekatherina Zhuravaskya, 2002, “Does Arbitrage Flatten Demand Curves for Stocks,” Journal of Business, vol. 75(4), 583-608.
Session 3: Psychology and Modeling Behavioral Biases
Wednesday, Apr. 9, 10:15-12:00, Room 349
***Angeletos, George-Marios, David Laibson, Andrea Repetto, Jeremy Tobacman, and Stephen Weinberg. “The Hyperbolic Buffer Stock Model: Calibration, Simulation, and Empirical Evaluation,”Journal of Economic Perspectives, forthcoming, 2001.
Babcock, Linda, George Loewenstein, S. Issacharoff, and Colin Camerer, “Biased judgments of fairness in bargaining,”American Economic Review, December 1995, 1337-1343
* Camerer, Colin (1995), “Individual Decision Making”, in Kagel and Roth (eds.), Handbook of Experimental Economics, Princeton University Press.
Camerer, Colin “Behavioral game theory: Formalizing the psychology of strategic thinking,” unpublished paper. 2000.
* Gabaix, Xavier and David Laibson, “A New Challenge for Economics: The Frame Problem"I. Broca and J. Carillo eds., forthcoming in Collected Essays in Psychology and Economics, Oxford University Press.
Gabaix Xavier and David Laibson (2000) “Bounded Rationality and Directed Cognition” Harvard Mimeo
*Faruk Gul and Pesendorfer Wolfgang (1999), “Self-control and the theory of consumption”, Mimeo Princeton Uninivesity
**Faruk Gul and Pesendorfer Wolfgang (2001), “Temptation and self-control”, Econometrica
Faruk Gul and Pesendorfer Wolfgang (2001), “A theory of addiction”, Mimeo Princeton University
* Harris Christopher and David Laibson (2001) “Instantaneous Gratification” Harvard Mimeo.
***Harris Christopher and David Laibson (2001) “Hyperbolic Discounting and Consumption” Econometrica.
Chris Harris and David Laibson “Dynamic Choices of Hyperbolic Consumers”, Harvard Mimeo
***Thaler, Richard and Hersh M. Shefrin (1981), “An Economic Theory of Self-Control,” Journal of Political Economy, 89, 392-406.
Session 4: Prospect Theory and Loss Aversion
*** Kahneman, Daniel, and Mark Riepe (1998), “Aspects of Investor Psychology”, Journal of Portfolio Management 24, 52-65.
* Kahneman, Daniel, and Amos Tversky (1974), “Judgment Under Uncertainty: Heuristics and Biases”, Science 185, 1124-31.
***Kahneman, Daniel, and Amos Tversky (1979), “Prospect Theory: An Analysis of Decision Under Risk”,Econometrica 47, 263-91.
Rabin, Matthew, and Richard Thaler (2001), “Risk Aversion,” Journal of Economic Perspectives 15(1), 219-232.
Rabin Matthew, (1998) “Psychology and Economics”,Journal of Economic Literature, 11-46
***Thaler, Richard (1999), “Mental Accounting Matters”, Journal of Behavioral Decision Making, vol. 12, pp. 183-206.
* Thaler, Richard, Amos Tversky, Daniel Kahneman, and Alan Schwartz (1997), “The Effect of, Quarterly Journal of Economics 112, 647-661.
Session 5: Evidence of Investor Behavior
April 30th, 10:15-12:00, room 349
Barber, Brad, and Terrance Odean (2001), "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment" with Brad Barber, Quarterly Journal of Economics, February 2001, Vol. 116, No. 1, 261-292.
*** Barber, Brad, and Terrance Odean (2000), Online Investors: Do the Slow Die First? , Review of Financial Studies, March 2002, Vol. 15, No. 2, 455-487.
* Barber, Brad, Terrance Odean, and Lu Zheng (2000), Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows, working paper, UC-Davis.
**Benartzi, Shlomo, and Richard Thaler (2001), “Naïve Diversification Strategies in Defined Contribution Savings Plans”, AER vol 91(1) pp. 79-98.
***Genesove, and Mayer (2001), “Loss Aversion and Seller Behavior: Evidence from the Housing Market”, Quarterly Journal of Economics 116(4) 1233-1260
Grinblatt, Mark, and Matti Keloharju (2001), “Distance, Language, and Culture Bias: The Role of Investor Sophistication,” Journa of Finance 56(3), 1053-73 .
Heath, Chip, Steven Huddart and Mark Lang, “Psychological Factors and Stock Option Exercises”, Quarterly Journal of Economics 114, 601-627
***Huberman, Gur, “Familiarity Breeds Investment”, Rev. Financ. Stud. 2001 14: 659-680
* Odean, Terrance (1998), "Are Investors Reluctant to Realize Their Losses?", Journal of Finance, Vol. LIII, No. 5, October 1998, 1775-1798.
Odean, Terrance (1998), "Do Investors Trade Too Much?", American Economic Review, Vol. 89, December 1999, 1279-1298.
***Barber & Odean FAJ paper (short review of their other papers)
BEHAVIORAL BIASES AND ASSET PRICING
Session 6: The equity premium puzzle
a) Facts and Rational Approaches
**Campbell, John Y. (1998), "Asset Prices, Consumption, and the Business Cycle", Chapter 19 in Handbook of Macroeconomics, John Taylor and Michael Woodford eds., North-Holland, Amsterdam, 1999.
Campbell, John Y. and Robert J. Shiller (1998), "Valuation Ratios and the Long-Run Stock Market Outlook", Journal of Portfolio Management.
***Cochrane, John, “Where is the Market Going? Uncertain Facts and Novel Theories”, Economic Perspectives, Federal Reserve Bank of Chicago, November/December 1997..
Fama, Eugene F. and Kenneth R. French (1988), “Dividend Yields and Expected Stock Returns”, Journal of Financial Economics 22, 3-25.
Mehra, Rajnish and Edward Prescott (1985), "The Equity Premium: A Puzzle", Journal of Monetary Economics 15, 145-161.
***Rajnish Mehra The equity premium: Why is it a puzzle?; ; Financial Analysts Journal, Charlottesville; Jan/Feb 2003; Vol. 59, Iss. 1; pg. 54, 16 pgs
* Shiller, Robert (1981), “Do Stock Prices Move too Much to be Justified by Subsequent Changes in Dividends?”, American Economic Review 71, 421-436
b) Behavioral Approaches
***Barberis, Nicholas, Ming Huang, and Tano Santos (2001), “Prospect Theory and Asset Prices”, Quarterly Journal of Economics, Volume: 116 Number: 1 Page: 1 - 53.
***Barberis, Nicholas, Ming Huang, and Tano Santos (2001), Mental Accounting, Loss Aversion, and Individual Stock Returns" ,Journal of Finance, August 2001.
***Bernartzi, Shlomo, and Richard Thaler (1995), “Myopic Loss Aversion and the Equity Premium Puzzle”, Quarterly Journal of Economics 110, 75-92.
* Benartzi Shlomo, and Richard Thaler (1999), “Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments,” Management Science 45, 364-381.
* Gneezy, Uri, and Jan Potters (1997), “An Experiment on Risk Taking and Evaluation Periods”, Quarterly Journal of Economics 112, 631-645.
Lakonishok, Josef, Andrei Shleifer, and Robert Vishny. 1994. “Contrarian investment, extrapolation, and risk,” Journal of Finance 49, 1541-1578.
* Sendhil Mullainathan and Richard Thaler. “Behavioral Economics,” NBER Working paper 7948, October 2000.
Session 7: The volatility puzzle
Wednesday, 14th of May, 10:15am-noon, Room 328.
* Barksy, Robert, and Brad De Long (1992), “Why does the stock market fluctuate?”, Quarterly Journal of Economics 107, 291-311.
* Modigliani, Franco and Richard Cohn (1974), “Inflation and the Stock Market, Financial Analysts Journal 35, 24-44.
**Thaler, Richard, and Eric Johnson (1985), “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice”, Management Science 36, 643
Session 8: Cross-sectional pricing implications
Banz, Rolf (1981), “The Relation between Return and Market Value of Common Stocks”, Journal of Financial Economics 9, 3-18.
Bernard, Victor (1992), “Stock Price Reactions to Earnings Announcements”, in Thaler (ed.) Advances in Behavioral Finance, ch.11.
* Chopra, Navin, Josef Lakonishok, and Jay Ritter (1992), “Measuring Abnormal Performance: Do stocks overreact?”, Journal of Financial Economics 31: 235-268
* Cochrane, John, “New Facts in Finance”, Economic Perspectives, Federal Reserve Bank of Chicago, Third Quarter 1999.
***De Bondt, Werner, and Richard Thaler (1985), “Does the Stock Market Overreact?”, Journal of Finance 40, 793-808
**Fama, Eugene (1991), "Efficient Capital Markets: II", Journal of Finance 46, 1575-1618.
Fama, Eugene F. and Kenneth R. French (1992),"The Cross-Section of Expected Stock Returns", Journal of Finance 47, 427-465.
Ikenberry, David, Josef Lakonishok, and Theo Vermaelen (1995), “Market Underreaction to Open Market Share Repurchases”, Journal of Financial Economics 39, 181-208.
***Jegadeesh, Narasimhan and Sheridan Titman (1993), "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency", Journal of Finance 48, 65-91.
***La Porta, Rafael, Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny (1994), "Good News for Value Stocks: Further Evidence on Market Efficiency”, Journal of Finance 49, 1541-1578.
Lakonishok, Josef and Seymour Smidt (1988), “Are Seasonal Anomalies Real? A Ninety Year Perspective”, Review of Financial Studies 3, 257-280.
b) Rational Approaches
Daniel, Kent and Sheridan Titman (1997), "Evidence on the Characteristics of Cross-Sectional Variation in Stock Returns", Journal of Finance 52, 1-33.
**Fama, Eugene F. and Kenneth R. French (1993), “Common Risk Factors in the Returns of Bonds and Stocks”, Journal of Financial Economics 33, 3-56.
**Fama, Eugene F. and Kenneth R. French (1996), "Multifactor Explanations of Asset Pricing Anomalies", Journal of Finance 51, 55-84.
Fama, Eugene F., 1998, “Market efficiency, long-term returns, and behavioral finance,” Journal of Financial Economics, Vol. 49(3), 283-306.
Lakonishok, Josef, Andrei Shleifer, and Robert Vishny, 1994, “Contrarian investment, extrapolation, and risk,” Journal of Finance Vol. 49(5), 1541-1578.
La Porta, Rafael, 1996, “Expectations and the cross-section of stock returns,”Journal of Finance, 51(5), 1715-1742.
c) Behavioral Approaches (Beliefs)
**Barberis, Nicholas, Andrei Shleifer, and Robert Vishny (1998), "A Model of Investor Sentiment", Journal of Financial Economics 49, 307-345
***Daniel, Kent, David Hirshleifer, and Avanidhar Subrahmanyam (1998), “Investor Psychology and Security Market Under- and Overreactions”, Journal of Finance 53, 1839-1885
**De Long, Brad, Andrei Shleifer, Lawrence Summers, Michael Waldmann (1990), “Positive Feedback Investment Strategies and Destabilizing Rational Speculation”, Journal of Finance 45,
***Hong, Harrison, and Jeremy Stein (1999), “A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets”, Journal of Finance 54, 2143-2184
***Hong, Harrison, Terence Lim, and Jeremy Stein (2000), “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies”, Journal of Finance 55, 265-295.
INSTITUTIONAL CONSTRAINTS AND RATIONALITY
Session 9: Market Frictions and Short sales constraints
May 21st, 10:15-12:00, room 349.
***Chen, Joseph, Harrison Hong, and Jeremy Stein (2002), “Breadth of Ownership and Stock Returns”,Journal of Financial Economics, Vol. 66, No. 2-3, November 2002 .
**Hong, Harrison, and Jeremy Stein (1999), “Differences of Opinion, Rational Arbitrage, and Market Crashes”, working paper, Stanford University.
***Hong Harrison, Joseph Chen and Jeremy Stein (2001), “Forecasting Crashes: Trading Volume,Past Returns and Conditional Skewness in Stock Prices”, Journal of Financial Economics, Vol 61, No.3, pp. 345-381.
* Jones, Charles and Owen Lamont, 2001, “Short sale constraints and stock returns,” University of Chicago Mimeo.
***Brav and Heaton, 2002, Competing theories of Financial Anomalies, Review of Financial Studies, March 2002, vol. 15, no. 2, pp. 575-606..
Cao, Coval and Hirshleifer, 2002, Sidelines investors, trading generated-news and security returns, Review of Financial Studies, 15.
* Scherbina, Anna (2000), “Stock Prices and Differences of Opinion: Empirical Evidence that Stock Prices Reflect Optimism”, working paper, Northwestern University.
Session 10: Styles
* Amihud, Yakov and Haim Mendelson, 1986, “Asset pricing and the bid-ask spread,” Journal of Financial Economics 17, 223-49.
* Chordia, Tarun, Richard Roll and Avanidhar Subrahmanyam, 2000, “Commonality in liquidity,”Journal of Financial Economics 56, 3-28.
**Baker, Malcolm and Jeremy Stein, 2001, “Market liquidity as a sentiment indicator,” Harvard University working paper.
**Barberis, Nicholas and Andrei Shleifer, 2001, “Style Investing,” Harvard mimeo.
**Barberis, Nicholas, Andrei Shleifer, and Jeffrey Wurgler, 2001, “Comovement,” Harvard Mimeo.
**Mullainathan, Sendhil, 2001, “Thinking through categories,” MIT mimeo,
BEHAVIORAL BIASES AND CORPORATE FINANCE
Sessions 11 and 12: Corporate Structure
May 28th, 13:15-15:00, room 975A.
***Baker, Malcolm, Jeremy Stein, and Jeffrey Wurgler, 2001, “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms,”
**Baker, Malcolm, Robin Greenwood, and Jeffrey Wurgler, 2001, “Do Firms Borrow at the Lowest-Cost Maturity? The Long-Term Share in Debt Issues and Predictable Variation in Bond Returns,” Harvard mimeo.
**Baker, Malcolm, and Jeffrey Wurgler (2000), “The Equity Share in New Issues and Aggregate Stock Returns,” Journal of Finance 55, 2219-2257
***Baker, Malcolm and Jeffrey Wurgler, 2002, “Market Timing and Capital Structure,” Journal of Finance, Vol. 57(1), 1-32.
Blanchard, Olivier, Changyong Rhee, and Lawrence Summers (1993), “The Stock Market, Profit, and Investment”, Quarterly Journal of Economics.
**Brav, Alon, and Paul A. Gompers, 2001, “The role of lock-ups in initial public offerings,” Review of Financial Studies forthcoming.
* Gompers, Paul A., and Josh Lerner, 2001, “The Really Long-Run Performance of Initial Public Offerings: Evidence from the Pre-Nasdaq Period, 1933-1972.” NBER Working Paper 8505
**Heaton, J.B., “Managerial Optimism and Corporate Finance”, working paper, University of Chicago.
Lintner, John (1956), “Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes”, American Economic Review 46, 97-113.
* Loughran, Tim, and Jay Ritter, 2002, “A Review of IPO Activity, Pricing, and Allocations,” University of Florida working paper.
**Loughran, Tim, and Jay Ritter (1995), “The New Issues Puzzle”, Journal of Finance 50, 23-50.
* Michaely, Roni, Richard Thaler, and Kent Womack, “Price Reactions to Dividend Initiations and Omissions”, Journal of Finance 50, 573-608
Miller, Merton (1986), “Behavioral Rationality in Finance: The Case of Dividends”, in Hogarth and Reder (eds.) Rational Choice, University of Chicago Press.
**Morck, Randall, Andrei Shleifer, and Robert Vishny (1993), “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity.
Ofek, Eli and Matthew Richardson, 2001, “Dotcom Mania: The Rise and Fall of Internet Stock Prices,” NBER Working Paper 8630.
Roll, Richard (1986), “The Hubris Hypothesis of Corporate Takeovers,” Journal of Business, 59, 197-216.
* Shefrin, Hersh and Meir Statman (1984), “Explaining Investor Preference for Cash Dividends”, Journal of Financial Economics 13, 253-282.
**Shleifer, Andrei and Robert Vishny, 2001, “Stock Market Driven Acquisitions,” Harvard mimeo.
***Stein, Jeremy (1996), “Rational Capital Budgeting in an Irrational World”, Journal of Business 69, 429-55.
***John R. Graham, Campbell R. Harvey (2001) "The theory and practice of corporate finance: Evidence from the field", Journal of Financial Economic vol. 61.
*** Heaton, . B., Gervais, Simon, and Odean, Terry (2203), Capital Budgeting in the Presence of Managerial Overconfidence and Optimism. Working paper