the role of feelings in investor decision making abstract this paper surveys the research on the influence of investor feelings on equity pricing and also develops a theoretical basis with which to understand the emerging findings of this area the theoretical basis is developed with reference to research in the fields of economic psychology and decision making recent advancements in understanding how feelings affect the general decision making of individuals especially under conditions of risk and uncertainty e g loewenstein et al 2001 psychological bulletin 127 267 286 are covered by the review the theoretical basis is applied to analyze the existing research on investor feelings e g kamstra et al 2000 american economic review forthcoming hirshleifer and shumway 2003 journal of finance 58 3 1009 1032 this research can be broadly described as investigating whether variations in feelings that are widely experienced by people influence investor decision making and consequently lead to predictable patterns in equity pricing the paper concludes by suggesting a number of directions for future empirical and theoretical research

do stock markets catch the flu we examine the impact of influenza on stock markets for the united states a higher incidence of flu is associated with decreased trading decreased volatility decreased returns and higher bid ask spreads consistent with the flu affecting institutional investors and market makers the decrease in trading activity and volatility is primarily driven by the incidence of influenza in the greater new york city area however the effect of the flu on bid ask spreads and returns is related to the incidence of flu nationally international data confirm our findings of a decrease in trading activity and returns when flu incidence is high

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

nash implementation a complete characterization the authors extend e maskin s results on nash implementation first they establish a condition that is both necessary and sufficient for nash implementability if there are three or more agents the case covered by maskin s sufficiency result second and more important they examine the two agent case for which there existed no general sufficiency results the two agent model is the leading case for applications to contracting and bargaining for this case too they establish a condition that is both necessary and sufficient the authors use their theorems to derive simpler sufficiency conditions that are applicable in a wide variety of economic environments copyright 1990 by the econometric society

perspectives on mechanism design in economic theory economics began with xenophon s oeconomicus c 360 bce in which socrates interviews a model citizen who has two primary concerns he goes out to his farm in the country to monitor and motivate his workers there then he goes back to the city where his participation in various political institutions is essential for maintaining his rights to own this farm such concerns about agents incentives and political institutions are also central in economic theory today but they were not always two centuries ago economics developed as an analytical social science by focusing on produc tion and allocation of material goods developing methodologies of national income accounting and price theory questions about resource allocation seemed particularly amenable to math ematical analysis because flows of goods and money are measurable and should satisfy flowbalance equations and no arbitrage conditions from this perspective the classical economic problem was that people s ability to satisfy their desires is constrained by limited resources the classical economic result was that unrestricted free trade can achieve allocative efficiency in the sense that reallocating the available resources cannot improve everyone s welfare a shift of focus from allocation of resources back to analysis of incentives began from the time of augustin cournot 1838 when economic theorists began to analyze optimal decisions of rational individuals as a tool for understanding supply and demand in price theory see jurg

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

weather and intraday patterns in stock returns and trading activity abstract we examine the relation between weather in new york city and intraday returns and trading patterns of nyse stocks while stock returns are found to be generally lower on cloudier days cloud cover has a significant influence on stock returns only at the market open there are significantly more seller initiated trades when there is more cloud cover at the market open which is consistent with the return results cloudy skies are associated with higher volatility and less market depth over the entire trading day finally cloud cover is not significantly correlated with spread measures and turnover ratios the findings overall suggest that weather has a significant influence on investors intraday trading behavior

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

contingent commodities and implementation abstract in this note we study the relevance of using contingent commodity allocations when states are not directly contractible in such a setting a contingent commodity allocation takes the form of a social choice function and the question is whether this function is implementable using only very mild assumptions on the rule for selecting contingent commodity allocations we derive a strong negative result which proves to be robust with respect to different solution concepts employed for implementation these findings have interesting implications for the interpretation of arrow debreu economies

sports sentiment and stock returns this paper investigates the stock market reaction to sudden changes in investor mood motivated by psychological evidence of a strong link between soccer outcomes and mood we use international soccer results as our primary mood variable we find a significant market decline after soccer losses for example a loss in the world cup elimination stage leads to a next day abnormal stock return of 49 basis points this loss effect is stronger in small stocks and in more important games and is robust to methodological changes we also document a loss effect after international cricket rugby and basketball games this paper employs a novel mood variable international soccer results to investigate the effect of investor sentiment on asset prices using a cross section of 39 countries we find that losses in soccer matches have an economically and statistically significant negative effect on the losing country s stock market for example elimination from a major international soccer tournament is associated with a next day return on the national stock market index that is 38 basis points lower than average we also document a loss effect after international cricket rugby and basketball games on average the effect is smaller in magnitude for these other sports than for soccer but is still economically and statistically significant we find no evidence of a corresponding effect after wins for any of the sports that we study controlling for the pre game expected outcome we are able to reject the hypothesis that the loss effect after soccer games is driven by economic factors such as reduced productivity or lost revenues we

measuring banks liquidity risk an option pricing approach abstract this paper proposes a new approach to evaluating banks liquidity needs which is not only well grounded theoretically but is also easy to apply practically within the framework of a global game with imperfect information we first establish a boundary condition for bank runs and show that there exists a unique nash equilibrium for bank runs using the option pricing approach we then obtain a closed form formula for the value of bank equity with both run risk and insolvency risk finally a bank s optimal liquidity ratio is derived by maximizing the value of bank equity using data on chinese listed banks we show that the deviation of the actual liquidity ratio from the optimal liquidity ratio in a bank represents a robust proxy for its liquidity risk an increased liquidity shortfall leads to worsening liquidity problems and this is particularly pronounced when the liquidity shortfall is high

the effect of time induced stress on financial decision making in real markets the case of traffic congestion abstract we study the role of stress induced by time constraints on investor decision making in real financial markets we use unexpected traffic congestion as a stress trigger our dependent variable is the slope of the implied volatility function ivf of options on russian trading system index rtsi futures at the left hand side of the volatility smile cf bollen and whaley 2004 controlling for relevant factors we find that this slope at the opening of the main trading session is higher subsequent to morning traffic jams suggesting that investors under stress assign higher weights to extreme loss scenarios this effect is economically exploitable before transaction costs

an impossibility result for virtual implementation with status quo in this paper virtual implementation is restricted to deliver on the equilibrium path either a socially optimal outcome or a status quo an outcome fixed for all preference profiles under such a restriction for any unanimous and implementable social choice function there is a dictator who obtains her most preferable outcome as long as all agents prefer this outcome to the status quo further restrictions on the lottery space and the range of social choice functions allow the dictator to impose her most preferred outcome even when other agents prefer the status quo to this outcome

monetary integration and the cost of borrowing with european monetary union emu there was an increase in the adjusted spreads of euro area sovereign securities over germany corrected from the foreign exchange risk causing a lower than expected fall in borrowing costs the objective of this paper is to study the reasons for this increase and in particular whether the change in the price assigned by markets was due to domestic factors credit risk and or market liquidity or to international risk factors the empirical evidence suggests that it may have been a change in the market assessment of domestic both liquidity and default risk rather than international factors that caused the observed increase in adjusted spreads with monetary integration even though since market size scale economies have increased since emu their effect differs according to the size of the market

mood induced variation in risk preferences abstract psychological research links good bad mood with increased decreased risk aversion this relation has been widely documented in experimental setups there has not been however a complementary analysis with real life decisions data this paper fills this gap by testing the relation between mood and risk attitude in capital markets to shed light on that relation we recover risk preferences from capital market data and employ accumulated evidence suggesting that people s mood is correlated with weather conditions corroborating established experimental evidence we find that good bad mood is associated with investors being less more willing to tolerate risk

the stock market effect of air pollution evidence from china abstractin financial studies environmental stimuli such as sunshine temperature and daylight are often used as proxies for people s collective mood swings to test their effects on the stock market china has experienced serious air pollution problems in recent years and chinese public awareness of air pollution has soared in this paper we use china as a natural experiment to investigate the effect on stock returns of depressed moods induced by air pollution daily air pollution data from 2005 to 2014 are analysed and the results obtained from the empirical research show that a contemporaneous negative and a two day lagged positive relationship exists between air pollution levels and stock returns over this time period the relationship is mediated by the influence of air pollution on investment decisions the results also indicate that the effect is weakened for companies that protect air quality but no stronger effect is detected for polluting companies the findings imply that air pollution is a

conditional heteroscedasticity in time series of stock returns evidence and forecasts this article presents new evidence about the time series behavior of stock prices daily return series exhibit significant levels of second order dependence and they cannot be modeled as linear white noise processes a reasonable return generating process is empirically shown to be a first order autoregressive process with conditionally heteroskedastic innovations in particular generalized autoregressive conditional heteroskedastic garch 1 1 processes fit to data very satisfactorily various out of sample forecasts of monthly return variances are generated and compared statistically forecasts based on the garch model are found to be superior copyright 1989 by the university of chicago

stock market returns a note on temperature anomaly this study investigates whether stock market returns are related to temperature research in psychology has shown that temperature significantly affects mood and mood changes in turn cause behavioral changes evidence suggests that lower temperature can lead to aggression while higher temperature can lead to both apathy and aggression aggression could result in more risk taking while apathy could impede risk taking we therefore expect lower temperature to be related to higher stock returns and higher temperature to be related to higher or lower stock returns depending on the trade off between the two competing effects we examine many stock markets world wide and find a statistically significant negative correlation between temperature and returns across the whole range of temperature apathy dominates aggression when temperature is high the observed negative correlation is robust to alternative tests and retains its statistical significance after controlling for various known anomalies

investor mood herding and the ramadan effect in view of evidence linking herding and social mood we examine whether the positive mood documented during ramadan translates into higher herding compared to non ramadan days drawing on a sample of seven majority muslim countries we report significant herding during ramadan in most of our sample markets additionally we show that herding appears significantly stronger within rather than outside ramadan for most tests whereby its significance is manifested on both ramadan and non ramadan days overall herding significance within outside ramadan exhibits some variation in its levels across markets in relation to variables reflective of market states both domestically market returns market volume and internationally us market returns us investors sentiment global financial crisis market states

does the sun shine on art prices this paper examines how variation in mood influences subjective risk and hence auction prices for art in london during the period 1990 2007 the private value of an object is closely related to taste and mood which is proxied for by the variation in weather using a unique data set that includes presale estimates for paintings sold through sotheby s and christie s auction houses as well as weather data for london from the british atmospheric data centre we find that the lower part of the price distribution is populated with paintings with a relative high private value whereas in the upper part prices are driven primarily by the common value characteristics our findings have important implications for collectors and investors in the art market

seasonal darkness and ipo abstract this paper analyses the possible relationship between a particular natural phenomenon the shortening of light hours in autumn and a financial issue the level of underpricing recorded on the first day of listing by the companies subject to initial public offering ipo it analyses a sample of 3102 ipos in 32 countries in the period between january 1 2006 and december 31 2016 the empirical evidence supports the assumption that seasonal darkness when there is a lack of light has a positive impact on the raw initial returns of the ipos made during this period the results obtained confirm the previous studies aimed at investigating the phenomenon suggest a possible behavioral interpretation and in conclusion make a positive contribution deriving from the large sample size the consideration of different latitudes and the assumed perspective

fair production and allocation of an excludable nonrival good we study fairness in economies with one private good and one partially excludable nonrival good a social ordering function determines for each profile of preferences an ordering of all conceivable allocations we propose the following free lunch aversion condition if the private good contributions of two agents consuming the same quantity of the nonrival good have opposite signs reducing that gap improves social welfare this condition combined with the more standard requirements of unanimous indifference and responsiveness delivers a form of welfare egalitarianism in which an agent s welfare at an allocation is measured by the quantity of the nonrival good that consumed at no cost would leave her indifferent to the bundle she is assigned

who pays for bank insolvency this paper discusses proposals for handling bank failures in a manner that is rapid enough to allow the business to continue respects the ranking of claims makes none of the parties worse off than under traditional insolvency and does not require taxpayer funds except to guarantee the new organization until recapitalization it considers the relationship between the regime for bank exit and the rest of the framework for regulation and supervision the role of market discipline in enabling solutions before the point of insolvency is reached the problems in assessing the costs of different exit regimes and public intervention

fear anger and credit on bank robberies and loan conditions we study the impact of emotions on real world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery we find significant differences in conditions of the loans granted after a robbery compared to changes in loan conditions that occur contemporaneously at unaffected branches in general loan officers seem to adopt so called avoidance behaviour in accordance with the literature on posttraumatic stress their avoidance behavior is halved within two weeks after the robbery and the effect further varies depending on the presence of a firearm during the robbery

nash implementation of the nash bargaining solution using intuitive message spaces abstract we provide mechanisms for the nash implementation of the nash bargaining solution if the set of possible payoff allocations is unknown to the planner while the status quo is known agents report payoff regions compatible with the status quo we remark that message spaces can be further reduced

investor mood and financial markets abstract numerous studies in recent decades have linked investor mood and financial market behavior but most works have been empirical investigations this paper bridges the gap between empirical findings and financial theory by slightly modifying the lucas lucas r e 1978 asset prices in an exchange economy econometrica 46 1429 1445 model this study shows how investor mood variations affect equilibrium asset prices and expected returns analysis results indicate that both equity and bill prices correlate positively with investor mood with higher asset prices associated with better mood conversely expected asset returns correlate negatively with investor mood further the mood effect on asset prices increases when investors are in a good mood and mood variations exhibit a greater influence on equity markets than on bill markets results of this study suggest that investor mood is a vital factor in equilibrium asset prices and returns and integrating investor mood into asset pricing models helps to interpret the growing body of seemingly anomalous evidence regarding investor behavior

ambivalent investment and the hold up problem in this paper we add to the foundations of incomplete contracting literature we study the hold up problem with ambivalent investment where investment benefits the investing party if ex post the right decision is undertaken but harms the investing party if the wrong decision is made in this context we show that the power of contracts to provide investment incentives depends on three factors the commitment value of contracts the amount of quasirents that the investing party can expect in the case of out of contract renegotiation and the degree of ambivalence of investment first contracts provide first best investment incentives when parties can commit to a contract regardless of the type of investment second with sufficiently ambivalent investment if parties cannot commit not to renegotiate a contract and if the investing party s bargaining power is intermediate contracts cannot improve investment incentives above those provided by no contract in contrast a simple buyer or seller option contract is optimal when the investing party s bargaining power is extreme jel d23 k12 l22

endogenous enforcement institutions we model the state as a self enforcing agreement over the use of force powerful individuals punish violations of contracts and property rights and if they shirk or abuse their power society reverts to a low production anarchy stage our model has two implications first improvements in coercion move the optimal enforcement system from private ordering where coercive punishments are not used to centralized state where punihments sanction violations by citizens but not by the ruler to decentralized state where punishments sanction all violations second institutions that reinforce the allegiance of state militias to the law simultaneously insure that contract violations are punished and that the ruler does not expropriate citizens thus they are more productive than judicial institutions which solely facilitate contract enforcement the model is consistent with the historical correlation between technological advances in coercion and the transition from private to state enforcement and with the fact that institutional constraints on the executive affected the long run economic development of nations more than improvements in judicial institutions acemoglu and johnson 2005 we also provide a framework for the optimal sequencing of institutional reforms they should focus first on the binding self enforcement constraint punishment or expropriation and switch to other constraints when the initially binding constraint becomes slack

do stock markets react to soccer games a meta regression analysis this study applies meta regression analysis to aggregate a sample of 1126 empirical estimates of the stock market reaction to soccer matches collected from 37 primary studies our results indicate

in the mood to consume effect of sunshine on credit card spending abstract using a large representative sample of high frequency credit card transactions in the united states this paper examines the causal effect of sunshine induced mood on contemporaneous household credit card spending we document a 0 3 percent increase in credit card spending in response to a one unit increase in the same day local abnormal sunshine the spending response is stronger for consumers with higher credit card debt lower fico score and shorter tenure with the bank the effect manifests in long term durable goods spending and is not driven by other weather conditions complementarity between sunshine and consumption or intentional choice of consumption time we document similar responses of spending on seasonal and non seasonal goods and during times with high and low sunshine levels finally the sunshine effect occurs among consumers with various characteristics

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

mood firm behavior and aggregate economic outcomes abstract this study examines whether mood affects the aggregate state level macroeconomy through its impact on firm level decisions using sky cloud cover as a proxy for mood we show that mood affects the economic expectations of small business managers after relatively sunnier periods managers have more optimistic expectations and the component of their expectations related to mood influences hiring and investment decisions consequently mood affects state level job creation and new business starts especially during periods of greater economic uncertainty these results suggest that mood induced economic expectations influence firm level managerial decisions and state level macroeconomic fluctuations

bank suspension of convertibility abstract a banking panic occurs when depositors at all banks seek a large reduction in their deposit holdings suspension of convertibility of demand deposits into currency was the banking system s response to a banking panic when depositors are incompletely informed about the state of bank investments a panic can occur when depositors expect capital losses conditional on having observed noisy indicators of the state of bank investments banks with superior information about the investments can signal to depositors by suspending convertibility that continuation of the long term investments is mutually beneficial

evidence for countercyclical risk aversion an experiment with financial professionals countercyclical risk aversion can explain major puzzles such as the high volatility of asset prices evidence for its existence is however scarce because of the host of factors that simultaneously change during financial cycles we circumvent these problems by priming financial professionals with either a boom or a bust scenario subjects primed with a financial bust were substantially more fearful and risk averse than those primed with a boom suggesting that fear may play an important role in countercyclical risk aversion the mechanism described here is relevant for theory and may explain self reinforcing processes that amplify market dynamics jel e32 e44 g01 g11 g12

good day sunshine stock returns and the weather psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood this paper examines the relationship between morning sunshine in the city of a country s leading stock exchange and daily market index returns across 26 countries from 1982 to 1997 sunshine is strongly significantly correlated with stock returns after controlling for sunshine rain and snow are unrelated to returns substantial use of weather based strategies was optimal for a trader with very low transactions costs however because these strategies involve frequent trades fairly modest costs eliminate the gains these findings are difficult to reconcile with fully rational price setting

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

tenable strategy blocks and settled equilibria when people interact in familiar settings social conventions usually develop so that people tend to disregard alternatives outside the convention for rational players to usually restrict attention to a block of conventional strategies no player should prefer to deviate from the block when others are likely to act conventionally and rationally inside the block we explore two set valued concepts coarsely and finely tenable blocks that formalize this notion for finite normal form games we then identify settled equilibria which are nash equilibria with support in minimal tenable blocks for a generic class of normal form games our coarse and fine concepts are equivalent and yet they differ from standard solution concepts on open sets of games we demonstrate the nature and power of the solutions by way of examples settled equilibria are closely related to persistent equilibria but are strictly more selective on an open set of games with fine tenability we obtain invariance under the insertion of a subgame with a unique totally mixed payoff equivalent equilibrium a property that other related concepts have not satisfied

poker player behavior after big wins and big losses we find that experienced poker players typically change their style of play after winning or losing a big pot most notably playing less cautiously after a big loss evidently hoping for lucky cards that will erase their loss this finding is consistent with kahneman and tversky s kahneman d a tversky 1979 prospect theory an analysis of decision under risk econometrica47 2 263 292 break even hypothesis and suggests that when investors incur a large loss it might be time to take a vacation or be monitored closely

is it the weather we show that results in the recent strand of the literature which tries to explain stock returns by weather induced mood shifts of investors might be data driven inference more specifically we consider two recent studies kamstra mark j kramer lisa a levi maurice d 2003a winter blues a sad stock market cycle american economic review 93 1 324 343 cao melanie wei jason 2005 stock market returns a note on temperature anomaly journal of banking and finance 29 6 1559 1573 that claim that a seasonal anomaly in stock returns is caused by mood changes of investors due to lack of daylight and temperature variations respectively while we confirm earlier results in the literature that there is indeed a strong seasonal effect in stock returns in many countries stock market returns tend to be significantly lower during summer and fall months than during winter and spring months as documented by bouman and jacobsen bouman sven jacobsen ben 2002 the halloween indicator sell in may and go away another puzzle american economic review 92 5 1618 1635 there is little evidence in favor of a sad or temperature explanation in fact we find that a simple winter summer dummy best describes this seasonality our results suggest that without any further evidence the correlation between weather related variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature

market mechanisms in online peer to peer lending online peer to peer lending p2p lending has emerged as an appealing new channel of financing in recent years a fundamental but largely unanswered question in this nascent industry is the choice of market mechanisms i e how the supply and demand of funds are matched and the terms price at which transactions will occur two of the most popular mechanisms are auctions where the crowd determines the price of the transaction through an auction process and posted prices where the platform determines the price while p2p lending platforms typically use one or the other there is little systematic research on the implications of such choices for market participants transaction outcomes and social welfare we address this question both theoretically and empirically we first develop a game theoretic model that yields empirically testable hypotheses taking into account the incentive of the platform we then test these hypotheses by exploiting a regime change from auctions to posted prices on one of the largest p2p lending platforms consistent with our hypotheses we find that under platform mandated posted prices loans are funded with higher probability but the preset interest rates are higher than borrowers starting interest rates and contract interest rates in auctions more important all else equal loans funded under posted prices are more likely to default thereby undermining lenders returns on investment and their surplus although platform mandated posted prices may be faster in originating loans auctions that rely on the crowd to discover prices are not necessarily inferior in terms of overall social welfare this paper was accepted by chris forman information systems

do weather induced moods affect the processing of earnings news we investigate whether unpleasant environmental conditions affect stock market participants responses to information events we draw from psychology research to develop a new prediction that weather induced negative moods reduce market participants activity levels exploiting geographic variation in equity analysts locations we find compelling evidence that analysts experiencing unpleasant weather are slower or less likely to respond to an earnings announcement relative to analysts responding to the same announcement but experiencing pleasant weather price association tests find evidence consistent with reduced activity due to weather induced moods delaying equilibrium price adjustments following earnings announcements we also use our analyst based research design to re examine an existing prediction that unpleasant weather induces investor pessimism and find evidence of both analyst pessimism and reduced activity in the presence of unpleasant weather together our study provides new evidence that both extends and reaffirms findings of a relation between unpleasant weather and market activities and contributes to the broader psychology and economics literature on the impact of weather induced mood on labor productivity this article is protected by copyright all rights reserved

contagious bank failures in a free banking system this paper develops a model of an unregulated banking system based around a private clearing house arrangement whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency it also increases the likelihood of contagious bank failures following a systemic shock or an aggregate liquidity shortage

implementation in economies with non convex production technologies unknown to the designer this paper deals with the problem of incentive mechanism design in non convex production economies when production sets and preferences both are unknown to the designer we consider nash implementation of loss free average cost marginal cost voluntary trading and quantity taking pricing equilibrium allocations in economies involving increasing returns to scale or more general types of non convexities the mechanisms presented in the paper are well behaved they are feasible continuous and use finite dimensional message spaces moreover the mechanisms work not only for three or more agents but also for two agent economies

a natural mechanism to choose the deserving winner when the jury is made up of all contestants abstract we analyze the problem of a jury choosing the winner from a set of agents when the identity of the deserving winner is common knowledge amongst the jurors but each juror is biased in favor of one different agent we propose a simple and natural mechanism that implements the socially optimal rule the winner is the deserving winner in subgame perfect equilibria

winter blues a sad stock market cycle and god said let there be light and there was light and god saw that the light was good genesis 1 3 depression has been linked with seasonal affective disorder sad a condition that affects many people during the seasons of relatively fewer hours of daylight experimental research in psychology has documented a clear link between depression and lowered risktaking behavior in a wide range of settings including those of a financial nature through the links between sad and depression and between depression and risk aversion seasonal variation in length of day can translate into seasonal variation in equity returns based on supportive evidence from psychology which suggests sad is linked closely with hours of daylight we consider stock market index data from countries at various latitudes and on both sides of the equator we model differences in the seasonal variation of daylight across coun

idiosyncrasies in australian petrol price behaviour evidence of seasonalities it has been argued that there are certain idiosyncrasies in australian petrol price behaviour to the extent that these idiosyncrasies result in large magnitude differences in petrol prices they may be exploited by consumers to significantly reduce their household expenditure on the product similarly such seasonalities may influence retailers in their purchase and storage decision the objective of this paper is to test for seasonalities in the australian retail petrol market the approach adopted is similar to that for determining calendar anomalies as documented in the financial and commodity markets literature we find that a monthly seasonal effect is pronounced with petrol prices lower in the months of february may and highest in july and august a day of the week effect is also apparent and is manifest in all petrol prices for capital cities adelaide brisbane melbourne and sydney across various years however the half month effect as is common in stock returns is not observed moreover contrary to popular belief that petrol prices are higher surrounding holidays no evidence of the holiday effect is found in brisbane and melbourne petrol prices also have some relationship to the mood of consumers as proxied using weather conditions this is not observed in adelaide and sydney

who will monitor the monitors informal law enforcement and collusion at champagne abstract informal monitors can sometimes substitute for formal law enforcement monitors hired to minimize cheating however are themselves vulnerable to collusion and extortion i focus on one such informal monitor the fair authorities at the trade fairs at champagne asking why the fairs survived for centuries instead of instantly crumbling in the face of the authorities overwhelming incentives to collude milgrom et al s 1990 seminal model of the champagne fairs is not equipped to deal with collusion though it does deal with extortion i show that there is a collusion proof equilibrium in an alternative model with a competing fair and merchant guilds self governed merchant communities and show how these institutions interact with the champagne fair authorities incentives this is invulnerable to collusion extortion and reverse extortion unscrupulous clients threatening to smear a monitor s reputation unless bribed i highlight the crucial roles of competition among monitors the existence of a collective body to organize coordinated punishment of monitors caught colluding and network effects among the monitor s customers that exacerbate any punishment

credible communication in dynastic government abstract this paper studies information disclosure in a model of dynastic government when information about past policy choices comes exclusively from the reports of previous administrations each administration has an incentive to choose its suboptimal one shot expenditure policy and then misrepresent its choice to its successor consequently it has been suggested that horizontal accountability i e a system of governance where auditing functions lie outside the executive branch can ensure credible disclosure of a government s activities this paper suggests a cautious approach to that view the baseline model examines the reporting incentives of an external auditor who can independently verify the information each period even with auditing credible disclosure is shown to be problematic various extensions to this baseline model are examined in one extension liberal i e those prefering larger government expenditures and conservative those prefering smaller expenditures regimes and auditors evolve over time it is shown that conservative liberal auditors are not credible when the current regime is also conservative liberal moreover because information transmission stops when the auditor s and the regime s biases coincide effective deterrents even in the good periods when the auditor s and the administration s biases differ are difficult to construct in all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for efficient policy choices these constraints are shown to bind away from optimal policies in standard constructions of equilibrium various ways in which auditing protocols can overcome these problems are discussed

exploitable predictable irrationality the fifa world cup effect on the u s stock market in a recently published paper edmans garcia and norli 2007 reveal a strong association between results of soccer games and local stock returns inspired by their work we propose a novel approach to exploit this effect on the aggregate international level with the following three unique features i the aggregate effect does not depend on the games results hence the effect is an exploitable predictable effect ii the aggregate effect is based on many games hence it is very large and highly significant we find that the average return on the u s market over the world cup s effect period is 2 58 compared to 1 21 for all days average returns over the same period length iii exploiting the aggregate effect is involved with trading in a single index for a relatively long period

efficient repeated implementation this paper examines repeated implementation of a social choice function scf with innitely lived agents whose preferences are determined randomly in each period an scf is repeated implementable in nash equilibrium if there exists a sequence of possibly history dependent mechanisms such that i its nash equilibrium set is non empty and ii every nash equilibrium outcome corresponds to the desired social choice at every possible history of past play and realizations of uncertainty we show with minor qualications that in the complete information environment an scf is repeated implementable in nash equilibrium if and only if it is ecient we also discuss several extensions of our analysis including constructions employing only nite mechanisms

divergence of sentiment and stock market trading this paper introduces the concept of divergence of sentiment to the behavioral finance literature we measure the distance between people with positive and negative sentiment on a daily basis for 20 countries by using data from status updates on facebook the prediction is that a higher divergence of sentiment leads to more diverging views on prospects and risks and thus to more diverging views on the value of a stock in line with this prediction divergence of sentiment is positively related to trading volume we further predict and find a positive relation between divergence of sentiment and stock price volatility the observed relations are stronger when individual investors are more likely to trade we compare the effect of our country specific measures to a global measure of divergence of sentiment we find that the separate effects of country specific and global divergence measures depend on a country s level of market integration

the psychological effect of weather on car purchases when buying durable goods consumers must forecast how much utility they will derive from future consumption including consumption in different states of the world this can be complicated for consumers because making intertemporal evaluations may expose them to a variety of psychological biases such as present bias projection bias and salience effects we investigate whether consumers are affected by such intertemporal biases when they purchase automobiles using data for more than 40 million vehicle transactions we explore the impact of weather on purchasing decisions we find that the choice to purchase a convertible or a four wheel drive is highly dependent on the weather at the time of purchase in a way that is inconsistent with classical utility theory we consider a range of rational explanations for the empirical effects we find but none can explain fully the effects we estimate we then discuss and explore projection bias and salience as two primary psychological mechanisms that are consistent with our results jel codes d03 d12

banking crises and the lender of last resort how crucial is the role of information this article develops a model of bank runs and crises and analyses how the presence of a lender of last resort lolr affects the solvency of the banking system we obtain a one to one mapping from the depositors equilibrium strategy to an optimal contract prevailing in the economy the study finds that the difference between a perfectly informed and an imperfectly informed lolr can be crucial our results indicate that a perfectly informed lolr is a pareto improvement however if the supervisory process of the lolr is subject to noise then the gains from ex post efficiency may be outweighed by ex ante inefficiency induced by moral hazard which is conducive to lower lending rates in the economy

stock return comovement around the dow jones islamic market world index revisions we examine patterns of comovement in stock returns around the dow jones islamic market world index djimwi quarterly revision events our analysis is based on a sample of 8250 companies from eighteen countries during the period may 1999 june 2012 we find that a stock s comovement with the djimwi increases when it joins and decreases when it leaves the index we also find that the comovement of newly added deleted stocks with the existing djimwi constituents increases declines during periods of high trading activity and during the month of ramadan further tests reveal that changes in the fundamentals have no impact on the comovements of added and deleted stocks overall our results indicate that stock returns respond to the emotional state of investors around information free events

a sheep in wolf s clothing can a central bank appear tougher than it is abstract central banks cbs in europe and the us have been providing virtually unlimited amounts of liquidity to banks for quite some time now this may lead banks to expect that these cbs will be lenient in the future will this expectation be justified i present a model in which a commercial bank subject to idiosyncratic liquidity shocks faces uncertainty about whether the cb is tough hawk or lenient dove specifically the cb knows its nature but the bank does not when uncertainty is high the cb can use this to its advantage and try to build a reputation for toughness in response the bank chooses higher liquidity reserves in equilibrium furthermore increasing bank capital and penalty rates make it easier to build a reputation while bailouts by the fiscal government make it more difficult

implementation in undominated strategies a look at bounded mechanisms this paper examines the impact of placing natural restrictions on the mechanisms considered for implementation problems it is shown that if all mechanisms are considered and preferences satisfy a basic condition then any social choice correspondence can be implemented in undominated strategies an example points out that the strength of this result derives from the use of mechanisms with questionable features in part of the message space the agent who announces the highest integer is rewarded this sort of tail chasing construction common in the constructive proofs of the literature is used to assure that undesired strategy combinations do not form an equilibrium if such mechanisms are ruled out then the social choice correspondences which can be implemented in undominated strategies satisfy an incentive compatibility type condition called strategy resistence for social choice functions this is equivalent to strategy proofness this contrast suggests that this issue should be examined as it applies to other solution concepts used in implementation theory the last portion of the paper begins to explore the issue as it relates to nash implementation and undominated nash implementation

complexity and repeated implementation this paper examines the problem of repeatedly implementing an ecient social choice function when the agents preferences evolve randomly we show that the freedom to set dierent mechanisms at dierent histories can give the planner an additional leverage to deter undesirable behavior even if the mechanisms are restricted to be simple and nite specically we construct a history dependent sequence of simple mechanisms such that with minor qualications every pure subgame perfect equilibrium delivers the correct social choice at every history while every mixed equilibrium is strictly pareto dominated more importantly when faced with agents with a preference for less complex strategies at the margin the ecient social choice function can be repeatedly implemented in subgame perfect equilibrium in pure or mixed strategies our results demonstrate a positive role for complexity considerations in mechanism design

delegated monitoring versus arm s length contracting abstract this paper analyzes the optimal organization of input suppliers in a procurement context we discuss when a top firm chooses to induce information sharing and active coordination between its suppliers consolidation rather than having them contract at arm s length delegation in designing the organization the firm anticipates that different supplier networks have different costs of inducing information revelation from suppliers when the cost of information sharing varies the optimal organization exhibits various discrete degrees of consolidation there is excessive arm s length contracting compared to the case where the top firm controls this organizational choice itself the paper offers also a methodology to study in a unified framework various organizational forms separately analyzed in the literature

mood betas and seasonalities in stock returns abstract existing research has found cross sectional seasonality of stock returns the periodic outperformance of certain stocks during the same calendar months or weekdays we hypothesize that assets different sensitivities to investor mood explain these effects and imply other seasonalities consistent with our hypotheses relative performance across individual stocks or portfolios during past high or low mood months and weekdays tends to recur in periods with congruent mood and reverse in periods with noncongruent mood furthermore assets with higher sensitivities to aggregate mood higher mood betas subsequently earn higher returns during ascending mood periods and earn lower returns during descending mood periods

sincere and sophisticated players in an equal income market abstract we study the simultaneous direct revelation mechanism associated with each equal income competitive social choice function in the allocation of objects and money among sincere and strategic agents strategic agents take advantage of sincere agents they non cooperatively coordinate on the equal income competitive allocations for the true preferences that are pareto undominated for them within the set of equal income competitive allocations sincere agents are protected to some extent however their welfare is usually above their maximin payoff

learning from schelling s strategy of conflict thomas schelling s strategy of confl ict is a masterpiece that should be recognized as one of the most important and infl uential books in social theory this paper reviews some of the important ideas in strategy of confl ict and considers some of the broader impact that this book has had on game theory economics and social theory by his emphasis on the critical importance of information and commitment in strate gic dynamics schelling played a vital role in stimulating the development of non cooperative game theory more broadly schelling s analysis of games with multiple equilibria has redefi ned the scope of economics and its place in the social sciences jel d74 f51 h56

fair divisions as attracting nash equilibria of simple games abstract we give a mechanism fully implementing envy free divisions such that strategy spaces are symmetric the set of nash equilibria is a global attractor for the best reply dynamics as a byproduct undesired mixed strategy equilibria are weeded out by the adjustment process

people on the verge of death evidence from impacts of celebrity suicides we attempt to identify the population who are vulnerable to emotional shocks by exploiting an unprecedented series of celebrity suicides in south korea during the last decade including one of the most famous actresses as well as a former president our conservative estimates show that for 5 out of 11 celebrity suicides observed 1 celebrity suicide on average yielded to more than 10 excessive suicides per day over a time frame of at least 2 weeks the results indicate that a significant number of people are very much mentally unstable to end their life by emotional shocks that should be irrelevant to their economic status

the lender of last resort abstract this paper develops a model of the lender of last resort lolr from a central bank cb viewpoint the model in a static setting suggests that the cb would only rescue banks which are above a threshold size consistent with the insight of too big to fail in a dynamic setting cb s optimal policy in liquidity support depends on the trade off between contagion and moral hazard effects our results show that contagion is the key factor affecting cb s incentives in providing lolr and they also provide a rationalization for constructive ambiguity

mood fluctuations projection bias and volatility of equity prices this paper focuses on the potential e2ects of small uctuations in investors subjective preferences speci5cally their discount factors and attitudes towards risk on the volatility of equity prices we brie y summarize some of the arguments and evidence regarding the uctuations in subjective preferences our analysis indicates that such uctuations may have signi5cant implications for understanding the volatility of the prices of 5nancial assets we derive a closed form expression for equilibrium equity prices and use this expression to map the uctuations in investors subjective preferences to the uctuations in equity prices our analysis suggests that small uctuations in the discount factor have potentially large e2ects on the latter for example if the standard deviation of the uctuations in the discount factor is of the order of 1 10th of one percent then this by itself can induce a 3 4 standard deviation in the uctuations in equity prices the uctuations in the attitude towards risk have a smaller but nevertheless non negligible e2ect we present the intuition underlying our conclusions c 2002 published by elsevier science b v

here comes the rain again weather and the intertemporal substitution of leisure i revisit the intertemporal labor supply framework using exogenous variations in daily weather to see how time at work varies with rain in my model a rainy day is associated with a lower enjoyment of leisure effectively increasing wages and bringing more hours at work i test the model using data from the american time use survey supplemented with daily weather i find that on rainy days men shift on average 30 minutes from leisure to work computations give a rough estimate of the intertemporal elasticity of labor supply of around 0 01 in line with the rest of the literature

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

characterizations of strategy proof mechanisms for excludable versus nonexcludable public projects first we characterize the unanimous mechanisms as the set of strategy proof individually rational and citizen sovereign mechanisms for the provision of a nonexcludable public project second we characterize the largest unanimous mechanisms as the set of strategy proof individually rational demand monotonic and access independent mechanisms for the provision of an excludable public project comparing these two classes of mechanisms we conclude that admitting partial exclusion always improves efficiency under the incentive compatibility constraint journal of economic literature classification numbers d71 d82 h41

granger causality in peripheral emu public debt markets a dynamic approach our research aims to analyze the possible existence of granger causal relationships in the behavior of public debt issued by peripheral member countries of the european economic and monetary union emu with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009 with this goal in mind we make use of a database of daily frequency of yields on 10 year government bonds issued by five emu countries greece ireland italy portugal and spain covering the entire history of the emu from its inception on 1 january 1999 until 31 december 2010 in the first step we explore the pair wise granger causal relationship between yields both for the whole sample and for changing subsamples of the data in order to capture the possible time varying causal relationship this approach allows us to detect episodes of significant increase in granger causality between yields on bonds issued by different countries in the second step we study the determinants of these episodes analyzing the role played by different factors paying special attention to instruments that capture the total national debt domestic and foreign in each country

financial crises payment system problems and discount window lending in a developed economy financial crises are rapidly conveyed to the payment system which tends to rely on private credit extensions in most countries while many authors recommend that the central bank do no more than provide adequate aggregate liquidity during a crisis this policy requires well functioning private credit markets to channel liquidity to solvent but illiquid firms this paper presents a model of private lending which defines a crisis as a time when lenders become uncertain about how to assess financial risks and therefore rationally withdraw from making new loans in such an environment a government lender of last resort can improve social welfare copyright 1996 by ohio state university press

but who will guard the guardians a pre recorded version of leonid hurwicz prize lecture was presented on 8 december 2007 at aula magna stockholm university the lecture was introduced by professor jorgen weibull chairman of the economics prize committee this abstract was borrowed from another version of this item

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive

happiness and time preference the effect of positive affect in a random assignment experiment abstract we conduct a random assignment experiment to investigate whether positive affect impacts time preference where time preference denotes a preference for present over future utility our result indicates that compared to neutral affect mild positive affect significantly reduces time preference over money this result is robust to various specification checks and alternative interpretations of the result are considered our result has implications for the effect of happiness on time preference and the role of emotions in economic decision making in general finally we reconfirm the ubiquity of time preference and start to explore its determinants djel d12 d83 i31

do markets respond more to more reliable labor market data a test of market rationality since 1979 the bureau of labor statistics bls has nearly quadrupled the size of the sample used to estimate monthly employment changes although first reported employment estimates are still noisy the magnitude of sampling variability has declined in proportion to the increase in the sample size a model of rational bayesian updating predicts that investors would assign more weight to the bls employment survey as it became more precise however a regression analysis of changes in interest rates on the day the employment data are released finds no evidence that the bond market s reaction to employment news intensified in the late 1980s or early 1990s for the time period as a whole an unexpected increase of 200 000 jobs is associated with an 8 basis point increase in the interest rate on 30 year treasury bonds and a 9 basis point increase in the interest rate on 3 month bills all else equal additionally announced hourly wage increases are associated with higher long tern interest rates while announced changes in the unemployment rate and revisions to past months employment estimates have a statistically insignificant effect on long term interest rates