Behavioural finance discards the assumptions of rationality and fair pricing, seeking to explain observed behaviour in financial markets by using the principles of psychology. Irrationality can be attributed to behavioural biases, which... more
Behavioural finance discards the assumptions of rationality and fair pricing, seeking to explain observed behaviour in financial markets by using the principles of psychology. Irrationality can be attributed to behavioural biases, which are either cognitive or emotional, both of which can lead to poor and irrational financial decisions. Kahneman and Tversky provided the early psychological theories that constitute the foundation of behavioural finance, and they also developed prospect theory that explains loss aversion. Irrationality is readily observable when, for example, people gamble against the odds or accept higher risk for lower return. Behavioural finance seeks to explain irrationality and the presence of market anomalies such as the calendar effects and profitable trading.
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Loss aversion bias, the disposition effect and representativeness bias have implications for trading decisions, financial planning and working capital management. We provide a discussion of the regret associated with losses and then... more
Loss aversion bias, the disposition effect and representativeness bias have implications for trading decisions, financial planning and working capital management. We provide a discussion of the regret associated with losses and then illustrate the relevance of this bias to the equity premium puzzle, optimal portfolio choice and other issues. We also explain how prospect theory is linked to the disposition effect. We discuss momentum and contrarian trading behaviour as it is a major focus for academics and practitioners and explore the implications of the disposition effect for various areas of finance. As far as representativeness is concerned, we examine its implications for investors’ sentiment, using the evidence provided by the overreaction and under-reaction literature.
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This chapter deals with a variety of biases, including the gambler’s fallacy, hindsight bias, panic, herd behaviour, status quo bias, survivorship bias, money illusion, attachment bias, familiarity and home bias, illusion of control,... more
This chapter deals with a variety of biases, including the gambler’s fallacy, hindsight bias, panic, herd behaviour, status quo bias, survivorship bias, money illusion, attachment bias, familiarity and home bias, illusion of control, conservatism bias and narcissism. We show that narcissists are drawn to finance, law and politics and suggest that narcissistic behaviour is to blame for the global financial crisis as the narcissistic personality disorder of corporate leaders led them to substitute robust risk management for greed and personal gains by promoting self-serving and grandiose aims. We argue that money illusion is more problematical than it appears to be because governments always under-report inflation, and that the status quo bias can lead to better or less bad outcomes than otherwise.
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ABSTRACT This article explores the factors that determine the effectiveness of environmental regulation in the United States and Australia. Unlike prior literature, in which lagging performance measures (such as carbon emissions) are... more
ABSTRACT This article explores the factors that determine the effectiveness of environmental regulation in the United States and Australia. Unlike prior literature, in which lagging performance measures (such as carbon emissions) are used, we use financial data to develop effectiveness scores and identify the determinants of effectiveness, including narcissistic behaviour, tenure of political leaders and financial indicators. Consistent with the emerging literature on environmental finance, we find that abnormal returns are associated with environmental regulation and that effectiveness is adversely affected when narcissistic leaders are in power. Our results remain robust when we control for various event windows and models.
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ABSTRACT The objective of this article was to evaluate the effect of announcements of financial regulation on risk and return in the Vietnamese equity market. The techniques used for the purpose of analysing risk and return include event... more
ABSTRACT The objective of this article was to evaluate the effect of announcements of financial regulation on risk and return in the Vietnamese equity market. The techniques used for the purpose of analysing risk and return include event study and non-parametric tests, as well as asset pricing models supplemented with interaction variables and a variety of ARCH-like specifications such as GARCH, TARCH, EGARCH and PARCH. We find evidence for the wealth effect, the presence of delayed response and a risk shifting behaviour in the form of diamond risk structure. Our results show that abnormal returns are present around the announcements of operating rules and other stock market regulations. Abnormal returns can also be obtained after considering legal documents such as circulars and decisions.
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Purpose The purpose of this paper is to test the effects of financial regulatory announcements on risk and return in the Vietnamese equity market. Design/methodology/approach The event study methodology is used for the return analysis,... more
Purpose The purpose of this paper is to test the effects of financial regulatory announcements on risk and return in the Vietnamese equity market. Design/methodology/approach The event study methodology is used for the return analysis, and asset pricing models are adjusted for the risk analysis. Various robustness tests are used, including the Corrado non-parametric ranking test and the Chesney et al. non-parametric conditional distribution test, as well as GARCH, TARCH, EGARCH and PARCH specifications for the risk models. Findings The authors find evidence for both negative and positive reactions as well as risk shifting behaviour in the form of a diamond risk structure. Originality/value This paper fills a major gap in the literature by investigating the market’s reaction to bank regulatory announcements across financial and non-financial sectors in the Vietnamese equity market.
Research Interests: Economics and Equity Law
This study examines the interaction of corporate profitability, working capital management and firm characteristics. Advanced quantitative techniques, such as dynamic panel estimation and median regression, are used to test the underlying... more
This study examines the interaction of corporate profitability, working capital management and firm characteristics. Advanced quantitative techniques, such as dynamic panel estimation and median regression, are used to test the underlying relations. The findings indicate that both size and debt ratio are important determinants of corporate profitability and that profitable firms and losing firms tend to have different determinants of profitability. Several findings indicate that the effects of the components of working capital on profitability depend on firm characteristics such as the state of working capital (surplus/deficit) and where the firm lies in the profitability league.
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... Available online 13 August 2009. ... We report significant short term negative abnormal returns around the September 11 attacks and to a lesser extent, the ... Our evidence shows a weak positive equity response to the Bali bombing,... more
... Available online 13 August 2009. ... We report significant short term negative abnormal returns around the September 11 attacks and to a lesser extent, the ... Our evidence shows a weak positive equity response to the Bali bombing, and no response from the Mumbai attack in the ...
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Event study methodology is a well-accepted technique in finance. Although its application is popular, there have not been many critical assessments of this practice. For instance, in the estimation process, the researcher has to make a... more
Event study methodology is a well-accepted technique in finance. Although its application is popular, there have not been many critical assessments of this practice. For instance, in the estimation process, the researcher has to make a choice in terms of which asset pricing model to adopt when calculating expected returns. Different expected return models and financial econometrics adjustments may give rise to different results. This study explores seven commonly employed approaches. Using terrorist attacks and the subprime crisis as events, we calculate abnormal returns with different expected return techniques and then assess if there is a change in the result. Our evidence shows that the results vary according to the choice of the technique in estimating an expected return.
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ABSTRACT Purpose – The structure of the Malaysian fund market presents a unique setting in which to examine behavioural and cultural differences in the performance of fund managers. The purpose of this paper is to utilise Taylor's... more
ABSTRACT Purpose – The structure of the Malaysian fund market presents a unique setting in which to examine behavioural and cultural differences in the performance of fund managers. The purpose of this paper is to utilise Taylor's extension of the tournament model of Brown et al. who argued that using an exogenous (endogenous) benchmark induces losing (winning) managers to gamble. This presents two competing testable hypotheses that are investigated in the current study. Design/methodology/approach – The authors use a sample of Malaysian unit trusts covering the period 1982 to 2010, applying the non-parametric cross-product ratio methodology to test all Malaysian funds and determine whether there is empirical evidence of tournament behaviour. The authors separate Malaysian funds into two main categories (conventional and Islamic) to find out whether different fund types affect the behaviour of the funds as a whole. Findings – Overall, Taylor's theory does not hold in the Malaysian fund market, as conventional funds display tournament behaviour regardless of the benchmark used. However, Islamic funds do not display any significant tournament behaviour. Originality/value – The current study uses a non-parametric approach to look for evidence of tournament (gaming) behaviour in the performance of fund managers in Malaysia. In doing so, the authors extend the tournaments literature by examining the performance of three data sets pertaining to the performance and evidence of tournament behaviour in: all managed funds in Malaysia; Islamic funds; and conventional funds. A major motivation for choosing the Malaysian data of unit trusts is to investigate and examine the behaviour of funds operating in an economy that is an emerging market in the rapidly expanding Asian economy; is a market that has a reporting period in line with the calendar year; and is an economy with a strong presence of Islamic funds (Shariah) and Muslim population.
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An increasing number of emerging and developing countries have adopted or are transitioning towards full-fledged inflation targeting (FFIT) as the main monetary policy framework to anchor inflation. In this paper, we explore the FFIT... more
An increasing number of emerging and developing countries have adopted or are transitioning towards full-fledged inflation targeting (FFIT) as the main monetary policy framework to anchor inflation. In this paper, we explore the FFIT regime as a means for Mauritius to achieve stable inflation, anchor inflationary expectations and establish credibility in committing monetary policy towards price stability as its primary goal. This paper reviews and highlights issues experienced with the current monetary policy framework and the challenges in transitioning towards FFIT. Given that forecasting is central to FFIT, we develop a practical model-based forecasting and policy analysis system (FPAS) to support transition to FFIT, taking into account structural features and shocks that are specific to the Mauritius economy.
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In this paper, we investigate the contribution of behavioural characteristics to the financial literacy of UAE residents after controlling for demographic factors. Specifically, we test the relationship between financial literacy and... more
In this paper, we investigate the contribution of behavioural characteristics to the financial literacy of UAE residents after controlling for demographic factors. Specifically, we test the relationship between financial literacy and behavioural biases such as representativeness, self-serving, overconfidence, loss aversion, and hindsight bias. Using data collected through survey questionnaires, we apply the methodology developed by the Organization of Economic Co-operation and Development (OECD) to compute financial literacy scores. Our overall results show that all behavioural biases except for overconfidence bias are positively related to financial literacy. Furthermore, some biases exhibit a stronger quantitative relationship with financial literacy than others. For example, hindsight bias displays the strongest link to financial literacy, followed by self-serving bias. The weakest but still statistically significant effect is loss aversion bias. Although biases, in general, have...
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ABSTRACT We consider the performance of cryptocurrencies in the light of fundamental asset pricing and portfolio theory. We observe how a traditional focus on reducing asset return volatility with Markowitz diversification misses the... more
ABSTRACT We consider the performance of cryptocurrencies in the light of fundamental asset pricing and portfolio theory. We observe how a traditional focus on reducing asset return volatility with Markowitz diversification misses the significance of such volatility for growth. The recognition that asset growth is more likely subject to exponential or continuously compounding growth characteristics reveals that asset volatility can be exploited both across assets and across investment periods to deliver superior returns.
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Empirical work on the environmental effects of FDI has produced a mixed bag of results, with hardly any evidence for Middle East and North Africa (MENA) countries. A theoretical model is presented, postulating that whether FDI has a... more
Empirical work on the environmental effects of FDI has produced a mixed bag of results, with hardly any evidence for Middle East and North Africa (MENA) countries. A theoretical model is presented, postulating that whether FDI has a positive or negative effect on the environment depends on the position of the underlying country or region on the environmental Kuznets curve (EKC). The empirical results indicate that FDI leads to environmental degradation in MENA countries and that they fall on the rising sector of the EKC. The theoretical model is supported by the empirical results.
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PurposeThis paper documents and links firm- and country-level outcomes to the United Nations Sustainable Development Goals (UNSDGs) by portraying how the Chinese economy has fared during the COVID-19 crisis. It does so by shedding light... more
PurposeThis paper documents and links firm- and country-level outcomes to the United Nations Sustainable Development Goals (UNSDGs) by portraying how the Chinese economy has fared during the COVID-19 crisis. It does so by shedding light on the factors that determine the effectiveness of health policies implemented in China.Design/methodology/approachUnlike the prior literature, in which lagging performance measures are used, the authors use leading indicators with event study methodology to develop effectiveness scores and identify the determinants of effectiveness, including financial variables, firm infection, geographical location of the spread, travel bans, lockdown periods, policies of home quarantine, health innovations and other innovative measures undertaken by the Chinese authorities.FindingsThe detailed disaggregated results show many dimensions where abnormal returns are indeed associated with various health policies and that the effectiveness, influenced by firm size, pr...
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The results of empirical work on the relation between health expenditure and environmental quality invariably show that environmental degradation has a positive effect on health expenditure, in the sense that more resources are allocated... more
The results of empirical work on the relation between health expenditure and environmental quality invariably show that environmental degradation has a positive effect on health expenditure, in the sense that more resources are allocated to healthcare to combat the effect of environmental degradation on health. In this paper, the relation between environmental degradation and health expenditure is examined by using data on 16 European countries. The analysis is conducted by using simulation, mathematical derivation and empirical testing using ARDL, FMOLS and non-nested model selection tests. The results reveal that in all cases the relation between per capita health expenditure and CO2 emissions is significantly negative and that in some cases the addition of income per capita as an explanatory variable does not make much difference. Negative correlation between health expenditure and environmental degradation is explained in terms of the environmental Kuznets curve and expenditure ...
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Purpose – This paper aims to document the measures taken by Australian corporate treasurers in the areas of cash, inventory, accounts receivable, accounts payable and risk management to survive the global financial crisis (GFC).... more
Purpose – This paper aims to document the measures taken by Australian corporate treasurers in the areas of cash, inventory, accounts receivable, accounts payable and risk management to survive the global financial crisis (GFC). Design/methodology/approach – Using qualitative techniques like interviews and a survey questionnaire, this paper summarises the various measures adopted by working capital managers. Findings – The results show that more than half of the participants in the survey altered their working capital management practices during the crisis. Capital expenditure was curtailed, as they aimed at preserving their cash levels while reducing inventory levels. Credit worthiness of institutions became more important, and there was a general decline in credit availability. The results also show that Australian working capital managers exhibit behavioural biases, particularly overconfidence. Originality/value – It is the first paper that uses open-ended questions to capture th...
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ABSTRACT Following the signing of the Kyoto protocol in 2005, a new wave of green policies emerged with the intention of protecting our planet. This study explores the effects these policies have on capital markets. In particular, we... more
ABSTRACT Following the signing of the Kyoto protocol in 2005, a new wave of green policies emerged with the intention of protecting our planet. This study explores the effects these policies have on capital markets. In particular, we assess how the risk and return of US industrial portfolios react to the announcement of green policies. Event study methodology and asset pricing models are used to that end. We document negative abnormal returns and increase in systematic risk for the biggest polluters whereas environmentally friendly businesses are affected to a lesser degree. An apparent Obama effect is observed, resulting from the 2008 outcome of the US presidential election.
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ABSTRACT This paper presents empirical evidence on the effects of environmental regulation announcements on corporate performance in China when performance is proxied by stock returns. While some results indicate the effectiveness of... more
ABSTRACT This paper presents empirical evidence on the effects of environmental regulation announcements on corporate performance in China when performance is proxied by stock returns. While some results indicate the effectiveness of environmental regulation, others point to the opposite. The perverse results are explained in terms of the lack of enforcement of environmental regulation, which is attributed to legislative shortcomings, poorly designed policy instruments, an unsupportive work environment for environmental regulators, a pro-growth political and social environment, and a cultural predisposition to harmony and consensus-building among those involved in the process.
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The main purpose of this paper is to explore a high-frequency tactical asset allocation strategy. In particular, we investigate the profitability of momentum trading and contrarian investment strategies for equities listed on the... more
The main purpose of this paper is to explore a high-frequency tactical asset allocation strategy. In particular, we investigate the profitability of momentum trading and contrarian investment strategies for equities listed on the Australian Stock Exchange (ASX). In these two strategies we take into consideration the short-selling restrictions imposed by the ASX on the stocks used. Within our sample portfolios we look at the relationship between stock returns and past trading volume for these equities. This research also investigates the seasonal aspects of contrarian portfolios and observes weekly, monthly and yearly effects. We report significant contrarian profits for the period investigated (from 2001 to 2006) and show that contrarian profit is a persistent feature for the strategies examined. We also document that contrarian portfolios earn returns as high as 6.54% per day for portfolios with no short-selling restrictions, and 4.71% in the restricted model. The results also supp...
Research Interests: Economics, Financial Economics, Asset Allocation, High Frequency, Seasonality, and 11 moreProfitability, Pacific Basin, STOCK EXCHANGE, Investment Strategies, Market Imperfection, Investment Strategy, Trade Volume, Stock Returns, Trading Strategy, Finance and Investment Banking, and Profitability Index
... Work Better for Dually-Traded Stocks: Evidence from Hong Kong Vikash Ramiah, Ka Yeung Cheng, Julien Orriols, Tony Naughton and ... Lee, Chan, Faff and Kalev (2003) and more recently Monagle, Ramiah, Hallahan and Naughton (2006) found... more
... Work Better for Dually-Traded Stocks: Evidence from Hong Kong Vikash Ramiah, Ka Yeung Cheng, Julien Orriols, Tony Naughton and ... Lee, Chan, Faff and Kalev (2003) and more recently Monagle, Ramiah, Hallahan and Naughton (2006) found that portfolios of heavily and ...