Effects of Hormones on Financial Risk Taking: A Research in Istanbul Stock Exchange

Abstract

Intraday pattern of stock returns are usually U-shaped on one-session markets and W-shaped on two-session markets. Today, the most accepted reason for these consistent patterns is the information accumulation during the non-trading hours. Nevertheless, there might be another reason that has grown out of the investor himself/herself. If so, this characteristic must work approximately the same for all the people in the world and must be endogenous. It leads us to the thought that this must be either a psychological or a physiological characteristic. Financial decision-making occurs on a rational thinking process, which is constrained by psychological factors. Physiological aspects may well affect those psychological factors, as we know hormones affect human behavior. Some hormones display a daily routine profile just as the intraday return. Hormones are the main biological factors that affect our actions. Cortisol turned out to be the most suitable hormone for such a research as it displays an inverse J-shaped daily profile and retains the characteristic as keeping people strong, which helps them adapt to long term stress and give them self-confidence that we foresee and covered in the paper. On the other hand, the pattern of this hormone is more in consistency with the intraday volatility rather than intraday return. Intraday volatility displays either a distorted U-shaped or an L-shaped daily profile in several stock exchanges around the world, which leads us to the thought that some time intervals must be more volatile than other time intervals within one day. The major objective of the study is to discover the association between daily volatility in Istanbul Stock Exchange (ISE) as a measure of aggregate risk taking and cortisol hormone levels of individuals, taken from previous research. Why volatility is chosen for this research also retains a conceptual reason. Return is not a measure for investor profile or risk taking of the investors. However, volatility is the measure of risk taking and indirectly self-confidence. The volatility part of the research is based on the immediate data from ISE in two different years. Each day was divided into day periods and the volatility of each period was calculated by the standard deviation of immediate data. Unlike our expectations, no significant relationship was found between daily cortisol level and intraday market volatility. Even though the cortisol level and volatility display consistency in the morning, the afternoon rise of the volatility in ISE distorts the relationship.