On the Linkage between Financial Risk Tolerance and Risk Aversion
Robert Faff
Monash University and The University of Leeds
Daniel Mulino
Monash University
Daniel Chai
Monash University
Abstract
We explore the linkage between financial risk tolerance (FRT) and risk aversion. To do this, we obtain FRT scores from a psychometrically validated survey, and conduct a battery of online lottery choice experiments, involving the same no student subjects. We contrast: real and hypothetical payoffs, low and high stakes, decision involving gains and losses, and order effects. Our key finding is that the two approaches to analyzing decision-making under uncertainty are strongly aligned. We present evidence that this is particularly the case for the female participants in our sample and when high-stake gambles are employed.
Liquidity Commonality Beyond Best Prices
Alexander Kempf
University of Cologne
Daniel Mayston
University of Cologne
Abstract
Previous market microstructure research focuses on commonality in liquidity at the inside spread. However, liquidity at the inside spread only determines the systematic liquidity risk of small and medium trades. We study commonality in displayed liquidity beyond best prices, which determines the systematic liquidity risk of large trades. We show that it is much larger than commonality at the inside spread. The deeper we look into the order book, the higher is the level of commonality. In addition, it rises in the morning and when markets fall.
The Investment Opportunity Set and its Proxy Variables
Tim Adam
Massachusetts Institute of Technology
Vidhan K. Goyal
Hong Kong University of Science and Technology
Abstract
We use a real options approach to evaluate the performance of several proxy variables for a firm's investment opportunity set. The results show that, on a relative scale, the market-to-book assets ratio has the highest information content with respect to investment opportunities. Although both the market-to-book equity and the earnings-price ratios are related to investment opportunities, they do not contain information that is not already contained in the market-to-book assets ratio. Consistent with this finding, a common factor constructed from several proxy variables does not improve the performance of the market-to-book assets ratio.
Glamour versus Value: Trading Behavior of Institutions and Individual Investors
Vivek Sharma
The University of Michigan-Dearborn
Jungshik Hur
Virginia Polytechnic Institute and State University
Heiwai Lee
The University of Michigan-Dearborn
Abstract
We design a new metric to measure the net buying and selling by institutions and individual investors in a stock from 1980 to 2004. Our first important finding is that, on the average, from 1980 to 2004, institutional investors were net buyers of growth stocks and net sellers of value stocks, implying that individual investors were net buyers of values stocks and net sellers of glamour stocks. Our second important finding is that the institutional preference for glamour and value stocks seems to be related to sell-side analysts' recommendations and recent favorable stock price performances, especially during the post-1994 period. However, after controlling for explanatory factors, the findings continue to show that institutional investors were net buyers of growth stocks and net sellers of value stocks throughout 1980-2004. Our third important finding is that the institutional buying of growth stocks and sale of value stocks was not based on superior information.