Insider trading,overconfidence, and private information flow

In this study, we investigate a dynamic model wherein an overconfident and a risk-neutral informed trader optimally exploit their long-lived private information regarding the value of an asset. We find that when the degree of overconfidence becomes larger, or the intensity of private information flow becomes larger relative to the initial private signal, the market becomes more stable. Additionally, we find that the greater the intensity of private information flow relative to the initial private signal, the more evident the patient transaction and the slower the information is incorporated in the price.     

Risk aversion,forward markets and the competitive labor-managed firm under price uncertainty

This paper examines the behavior of a labor-managed co-operative firm which can sell its output in both spot and forward markets, where the random spot price varies between a price floor and a price ceiling but the forward price is a known parameter. We demonstrate that a risk-averse labor-managed firm will base its production decision on the forward market price, and that risk aversion is sufficient to give the direct relationship between a change in uncertainty and the amount hedged in the forward market.     

Arbitrage concepts under trading restrictions in discrete-time financial markets

In a discrete-time setting, we study arbitrage concepts in the presence of convex trading constraints. We show that solvability of portfolio optimization problems is equivalent to absence of arbitrage of the first kind, a condition weaker than classical absence of arbitrage opportunities. We center our analysis on this characterization of market viability and derive versions of the fundamental theorems of asset pricing based on portfolio optimization arguments. By considering specifically a discrete-time setup, we simplify existing results and proofs that rely on semimartingale theory, thus allowing for a clear understanding of the foundational economic concepts involved. We exemplify these concepts, as well as some unexpected situations, in the context of one-period factor models with arbitrage opportunities under borrowing constraints.     

Insider trading and performance of seasoned equity offering firms after controlling for exogenous trading needs

Insiders trade not only because they have private information about their companies but also because of other exogenous reasons. Therefore, it is important to control for exogenous trading needs in empirical studies regarding insider trading. Lee (1997) shows that insider trading is not closely related to the long-term performance of primary seasoned equity offering firms. This paper examines whether the results hold after controlling for exogenous needs to trade by using an inequality test with instrumental-variables technique.     

Equal risk pricing under convex trading constraints

In an incomplete market model where convex trading constraints are imposed upon the underlying assets, it is no longer possible to obtain unique arbitrage-free prices for derivatives using standard replication arguments. Most existing derivative pricing approaches involve the selection of a suitable martingale measure or the optimisation of utility functions as well as risk measures from the perspective of a single trader.We propose a new and effective derivative pricing method, referred to as the equal risk pricing approach, for markets with convex trading constraints. The approach analyses the risk exposure of both the buyer and seller of the derivative, and seeks an equal risk price which evenly distributes the expected loss for both parties under optimal hedging. The existence and uniqueness of the equal risk price are established for both European and American options. Furthermore, if the trading constraints are removed, the equal risk price agrees with the standard arbitrage-free price.Finally, the equal risk pricing approach is applied to a constrained Black–Scholes market model where short-selling is banned. In particular, simple pricing formulas are derived for European calls, European puts and American puts.     

Optimal consumption and investment under time-varying relative risk aversion

We consider the continuous time consumption-investment problem originally formalized and solved by Merton in case of constant relative risk aversion. We present a complete solution for the case where relative risk aversion with respect to consumption varies with time, having in mind an investor with age-dependent risk aversion. This provides a new motivation for life-cycle investment rules. We study the optimal consumption and investment rules, in particular in the case where the relative risk aversion with respect to consumption is increasing with age.     

Prediction market prices under risk aversion and heterogeneous beliefs

In this paper, we examine the properties of prediction market prices when risk averse traders have heterogeneous beliefs in state probabilities. We show that the equilibrium state prices equal the mean beliefs of traders about that state if and only if the traders’ common utility function is logarithmic. We also provide a necessary and sufficient condition ensuring that the state prices are systematically below or above the mean beliefs of traders, thus providing a rational explanation to the favorite-longshot bias in prediction markets.     

Feasible sets,comparative risk aversion,and comparative uncertainty aversion in bargaining

We study feasible sets of the bargaining problem under two different assumptions: the players are subjective expected utility maximizers or the players are Choquet expected utility maximizers. For the latter case, we consider the effects on bargaining solutions when players become more risk averse and when they become more uncertainty averse.     

A healthcare facility location problem for a multi-disease,multi-service environment under risk aversion

This paper presents a stochastic optimisation model for locating walk-in clinics for mobile populations in a network. The walk-in clinics ensure a continuum of care for the mobile population across the network by offering a perpetuation of services along the transportation lines, and also establishing referral systems to local healthcare facilities. The continuum of care requirements for different diseases is modelled using coverage definitions that are designed specifically to reflect the adherence protocols for services for different diseases. The risk of not providing the required care under different realisations of health service demand is considered. In this paper, for a multi-disease, multi-service environment, we propose a model to determine the location of roadside walk-in clinics and their assigned services. The objective is to maximise the total expected weighted coverage of the network subject to a Conditional-Value-at-Risk (CVaR) measure. This paper presents developed coverage definitions, the optimisation model and the computational study carried out on a real-life case in Africa.     

Decreasing downside risk aversion and background risk

In this paper, we show that risk vulnerability can be associated with the concept of downside risk aversion (DRA) and an assumption about its behavior, namely that it is decreasing in wealth. Specifically, decreasing downside risk aversion in the Arrow–Pratt and Ross senses are respectively necessary and sufficient for a zero-mean background risk to raise the aversion to other independent risks.     

Substitution,risk aversion,taste shocks and equity premia

This paper gauges the relative contribution of risk aversion, inter-temporal substitution and taste shocks on postwar monthly US equity premia. The time-varying consumption, market, and taste risks involved in the Euler equations are recovered from a common factor GARCH process and the MLE are obtained by applying the Kalman filter. Empirically, (1) the market risk is the only source of risk that does not statistically affect the equity premia, and thus, the hypothesis that the coefficient of relative risk aversion corresponds to the reciprocal of the elasticity of inter-temporal substitution is not rejected; (2) the estimates are reasonable, so that the equity premium puzzle is circumvented; and (3) taste risks are quantitatively important in capturing excess returns movements. © 1998 John Wiley & Sons, Ltd.     

Heterogeneity in risk aversion and risk sharing regressions

Heterogeneity in risk attitudes, if not properly accounted for, may induce a bias on the income coefficient of standard consumption insurance regressions. We show that, extending the theoretical analysis and empirical findings in Schulhofer‐Wohl (Journal of Political Economy, 2011, 119, 925–958), the sign of the bias is ambiguous, and depends on cycle‐related variables and on the covariances of both aggregate and idiosyncratic risk with individual risk aversion.     

Endogenous incompleteness of financial markets: The role of ambiguity and ambiguity aversion

Incompleteness of financial markets has been widely questioned in the literature, but traditional research has been mainly focused on the role of transaction costs and asymmetric information in determining such incompleteness. This paper, instead, focuses on agents’ preferences, showing that the introduction of ambiguity and ambiguity aversion may induce investors to restrict their trading to a simpler set of assets, relative to which they are less likely to make errors.     

Feedback trading in exchange-rate markets: Evidence from within and across economic blocks

This paper examines the pattern of autocorrelation of exchange rates in the EU, ASEAN, and NAFTA. We find no feedback trading within blocks among developed financial markets’ currencies, but it exists for less developed financial markets. Across blocks, no feedback trading is found. ASEAN currencies are an exception on both counts. When present, feedback trading is a destabilizing factor, and it takes place during rising volatility. Finally, the prevalence of negative feedback trading suggests that, in spite of the recent addition of new players into the market, such as mutual funds and hedge funds, the foreign exchange market is mainly influenced by informed players and/or central banks which intervene to protect their currencies.     

The Sarbanes-Oxley Act and CEO tenure,turnover, and risk aversion

Using a sample of CEO turnover from 1999 to 2005, we find that CEOs become significantly more risk averse following the passage of the Sarbanes-Oxley Act, SOX. Their increased risk aversion may serve as an explanation for why CEO tenure is not significantly shortened and forced CEO turnover is not more likely post-SOX, as we document in this paper. In addition, we provide evidence that financial restatements have some effects on CEO tenure and the probability of forced CEO turnover. This may be due to intensified monitoring activities by the board and the financial press in the post-SOX era, but we cannot contribute all of it to SOX. In some occasions, SOX seems to weaken the effect of board monitoring on CEO tenure and the effect of firm performance on CEO risk aversion. Though the increased monitoring level post-SOX contribute to the increased CEO risk aversion, little impact is found from the SOX-mandated accuracy and transparency of financial reporting.     

Volatility risk and economic welfare

This paper examines the effects of time-varying volatility on welfare. I construct a tractable endogenous growth model with recursive preferences, stochastic volatility, and capital adjustment costs. The model shows that a rise in volatility can decelerate growth in the absence of any level shocks. In contrast to level risk, which is always welfare reducing for a risk-averse household, volatility risk can increase or decrease welfare, depending on model parameters. When calibrated to U.S. data, the model finds that the welfare cost of volatility risk is largely negligible under plausible model parameterizations.     

Multivariate risk aversion utility,application to ESG investments

This paper uses the concept of multivariate or multi-attributive utility to attach different risk aversion levels to different sources of wealth (e.g. sectors, stocks, asset classes). In this context, we address the topic of environmental, social, and corporate governance (ESG) investments from the perspective of an investor with different risk aversion levels to green and brown stocks. We obtain closed-form solutions for the optimal allocations, value function, and wealth equivalent losses (WEL) from suboptimal choices. The numerical analysis demonstrates the significant increase, of up to 33%, in green investments when accounting for a differential in risk aversions levels, with up to 65% in WEL when using same risk-aversion levels.¹     

Animal Behavior in Capital markets: Herding formation dynamics,trading volume,and the role of COVID-19 pandemic

This paper provides new evidence on herding behavior. Using daily frequency data for 336 US listed firms over a five-year period, we investigate three important elements of financial herding behavior. First, trading volume, representing market interest, as a significant variable in capital markets apart from stock prices. Second, herding dynamics since herding formation is a dynamic process. Third, the reaction of possible financial herding to exogenous events-threats, as we use the pandemic event in order to investigate a market under stress. Even though the benchmark herding model used does not provide evidence of herding behavior, our results verify the significance of the above herding elements. We also find that trading volume and positive changes in trading volume result in increased cross-sectional absolute deviation (CSAD). Most importantly, we find that herding behavior is evident during the COVID-19 pandemic confirming that investors tend to herd during major crisis periods.