Heterogeneous Investors Research Articles

Risk‐Sharing and the Term Structure of Interest Rates

ABSTRACTI propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' elasticities of intertemporal substitution are critical in accounting for the dynamics of nominal and real yields. The nominal term structure is driven primarily by real shocks so that it can be upward sloping regardless of the correlation between nominal and real shocks.

The interplay between reputation and heterogeneous investment enhances cooperation in spatial public goods game

In previous studies about heterogeneous investment, many researchers only focus on the monodirectional effect of reputation, but ignore the reversed influence about the heterogeneity of reputation fluctuation driven by investment. Given this, considering the interplay between reputation and heterogeneous investment, we explore the evolution of cooperation in public goods game. In detail, each player's reputation situations in different groups determine its differentiated investment amounts, and in turn, the heterogeneity of reputation fluctuation is dependent on how much it invests into each group. Furthermore, we introduce two parameters, α and β, to characterize the effect degree of investment on heterogeneous reputation fluctuation and the one of reputation on heterogeneous investment, respectively. The simulation results suggest that cooperation can be boosted to some extent, especially for the larger α and β, as they magnify the interplay of reputation and heterogeneous investment.

The Shadow Costs of Illiquidity

AbstractWe solve a flexible model that captures transactions costs and infrequencies of trading opportunities for illiquid assets to better understand the shadow costs of illiquidity for different origins of asset illiquidity and heterogeneous investor types. We show that illiquidity that results in suboptimal asset allocation carries low shadow costs, whereas these costs are high when illiquidity restricts consumption. As a result, the shadow costs are high for short-term investors, investors who face substantial liquidity shocks, and investors who desire to allocate a large fraction of their wealth to illiquid assets.

Defectors in bad circumstances possessing higher reputation can promote cooperation.

In nature and human society, social relationships and behavior patterns are usually unpredictable. In any interaction, individuals will constantly have to deal with prior uncertainty. The concept of "reputation" can provide some information to mitigate such uncertainty. In previous studies, researchers have considered that only cooperators are able to maintain a high reputation; no matter the circumstances of a defector, they are classified as a faithless individual. In reality, however, some individuals will be forced to defect to protect themselves against exploitation. Therefore, it makes sense that defectors in bad circumstances could also obtain higher reputations, and cooperators can maintain higher reputations in comfortable circumstances. In this work, the reputations of individuals are calculated using the fraction of their neighbors who have the same strategy. In this way, some defectors in a population may obtain higher reputations than some cooperators. We introduce this reputation rule using heterogeneous investments in public goods games. Our numerical simulation results indicate that this reputation rule and heterogeneous investments can better stimulate cooperation. Additionally, stronger investment heterogeneity can further increase the level of cooperation. To explain this phenomenon, dynamical evolution is observed in Monte Carlo simulations. We also investigated the effects of the noise intensity of the irrational population and the original proportion of cooperation in the population. The robustness of this cooperation model was also considered with respect to the network structure and total investment, and we found that the conclusions remained the same.

Investment response to exchange rate uncertainty: Evidence from Chinese exporters

This paper empirically examines the impact of exchange rate uncertainty on firm-level investment using data collected from the incidence of an exogenous uncertainty shock caused by the 2005 change in China's exchange rate policy. The results show that the higher RMB exchange rate uncertainty induced by the policy change significantly weakened Chinese exporters' response of investment to demand shocks. Moreover, exporters with higher degrees of capital irreversibility were found to be more sensitive to the uncertainty shock, which is consistent with the capital irreversibility hypothesis that has been identified in the macroeconomic literature. This paper also documents heterogenous investment responses to uncertainty across firms.

Cost stickiness and stock price crash risk

AbstractWe examine the association between cost stickiness and the risk of stock price crash, defined as asymmetry in the distribution of weekly stock returns. We use information opaqueness and heterogeneous investor beliefs as our two theoretical frameworks. Using a sample of US firms, we find a positive association between cost stickiness and crash risk. This association is more pronounced for firms with an opaque information environment as proxied by fewer analysts following. As efficient cost management is key to profit maximisation, studying the implications of cost stickiness makes a valuable contribution to the literature on cost management.

Institutional Investor Heterogeneity and Corporate Response to the Covid‐19 Pandemic

We examine the role of institutional investors in determining firms’ decisions whether to reduce dividends and share buybacks during the Covid‐19 pandemic. Our simple model predicts that the probability of cuts in payouts is linked to the holdings and types of institutions. We link our model to the attention‐based theories of the firm. We posit that the highly proximate nature of the pandemic may encourage greater risk aversion in organizations. Consequently, the presence of institutions that actively engage with managers results in a reduction in shareholders’ payouts during the pandemic to enable firms to deal with increased uncertainty, while institutions that seek short‐term value releases reduce the probability of cuts. We test our hypotheses using novel hand‐collected data on shareholders’ payout cuts in the UK during the Covid‐19 lockdown. We find that in firms with larger institutional holdings, shareholders’ payouts are more likely to be reduced as a response to the pandemic. However, institutional heterogeneity matters as institutions with a view to improve firms’ long‐term growth are more likely to affect corporate payout decisions. In contrast, institutions that focus on regular income (e.g. pension funds) seem to resist cuts even in the aftermath of a severe exogenous shock like the Covid‐19 pandemic.

Heterogeneous investor attention and post earnings announcement drift: Evidence from China

We investigate the impacts of retail and nonretail investor attention on post earnings announcement drift (PEAD) in China. Prior studies mainly posited that investor attention helps to interpret earnings news. However, we suggest that retail (nonretail) investor attention is positively (negatively) related with PEAD from 2011 to 2018 when employing the abnormal search index and abnormal turnover residual as proxies for retail and nonretail investor attention. This is robust when using alternative methodology andmeasures and introducing instrumental variables. Additional analyses prove that this is because retail (nonretail) attention is positively (negatively) associated with firms’ information uncertainty, illiquidity and leads to irrational (rational) behavior. Moreover, the influence of retail investor attention on PEAD is stronger as the stock price approximates its 52 week high. These findings emphasize the significance of investor sophistication when studying the function of investor attention in the financial market.

How Does Monetary Policy Affect Prices of Corporate Loans?

<ns3:p>This paper studies the impact of unanticipated monetary policy news around FOMC announcements on secondary market corporate loan spreads. I find that the reaction of loan spreads to monetary policy news is weaker than that of bond spreads: following an unanticipated monetary policy tightening (easing) shock, loan spreads do not increase (decrease) as much as bond spreads do. Decomposition of the spreads into compensations for expected defaults and risk premiums shows that differential reactions of loan and bond risk premiums are the main driver of the differential spread reactions. This paper further finds that the weaker loan spread reactions to monetary policy shocks are more pronounced for riskier loans. Lastly, reactions of primary market loan spreads to monetary policy shocks are also muted. These findings highlight heterogeneous impacts of monetary policy across different types of corporate credit markets, possibly reflecting heterogeneous investor demand responses to monetary policy in those markets.</ns3:p>

Conditions for bubbles to arise under heterogeneous beliefs

This study examines the price bubble of a continuous-time asset traded in a market with heterogeneous investors. Our market constitutes a positive mean-reverting asset and two groups of investors with different beliefs about the model parameters. We provide an equivalent condition for the formation of bubbles and show that price bubbles may not form, although there are heterogeneous beliefs. This suggests that investor heterogeneity does not always result in a bubble, and additional analysis on the drift term is required. Additionally, when investors agree on the volatility, the explicit bubble size can be calculated through a differential equation argument. Analysis of this bubble formula clearly justifies that our model is indeed realistic.

The uneven geography of real estate investment by Mainland Chinese state-owned and private enterprises in the U.S.: Local market conditions, migration, and ethnic networks

Since the 2010s, foreign direct investment in real estate (FDIRE) by Mainland Chinese firms has emerged as a major force within global real estate markets, challenging Western investors’ traditional dominance. It is unclear, however, whether Mainland Chinese FDIRE is fueled by the same motivations as those of investors from advanced economies, which to date have represented both the primary investors and main objects of study. One major difference may be that Mainland Chinese investment originates in an institutional environment comprised of strong state intervention and social networks important for fostering business and ethnic ties. To uncover the potentially unique determinants and heterogeneity of Mainland Chinese corporate real estate investors, we build and analyze a state-level panel dataset of Mainland Chinese FDIRE by state-owned enterprises and private enterprises in the U.S. from 2010 to 2017. Our empirical results reveal the importance of Chinese migrants in promoting Mainland Chinese real estate investment, especially by private enterprises. Our findings also demonstrate that at the state level, Mainland Chinese FDIRE exhibits few agglomerative tendencies.

Heterogeneous investments induced by emotions promote cooperation in public goods games

Emotion plays an important role in heterogeneous investments and has some direct effects on the cooperation behaviour of a player in a public goods game (PGG). How this irrational factor affects the heterogeneous investments and what level of cooperation is present in players with emotions are still unknown to us. Here, the heterogeneous investments induced by emotions into a PGG were introduced. The emotional index was firstly quantified by considering a memory-cumulative effect, and then an investment formula was proposed based on this emotional index. At last, the effect of emotions on the cooperation behaviour in a PGG was investigated. Results show that the heterogeneous investments induced by emotions can improve cooperation significantly in a PGG, and that an increase of the memory length, the emotional increment, or the memory discounting factor can improve the cooperation level.

Heterogeneous Investors and Risk Prices in the Municipal Bond Market

Heterogeneous Investors and Risk Prices in the Municipal Bond Market

The Behavior and Impact of Heterogeneous Investors in China’s Stock Index Futures Market: An Agent‐Based Model on Cross‐Market Trades

Since the period of unusual volatility in China’s A‐share market in 2015, there has been an ongoing discussion about the role of stock index futures in the A‐share market. There is no unified consensus among academics and industry insiders on whether stock index futures affect spot market volatility. Using agent‐based modeling, we construct a theoretical model of the order book of the stock index futures market to assess the microbehavior of speculators, arbitrageurs, and hedgers in this market. We then calibrate the link between the futures and spot models to explore the respective influences of heterogeneous investors in the two markets. We find that speculators, arbitrageurs, and hedgers all play different roles and have varying effects on the two markets. While speculators serve as the foundation for other investors to participate in trading activities, both arbitrageurs and hedgers affect the spot market by significantly reducing volatility, enhancing price efficiency, and playing a positive role in the operation of this market. We develop our model from the perspective of investor behavior and explain why the stock index futures market can reduce spot market volatility. In addition, our conclusion may help regulators understand the roles played by different types of investors in the Chinese stock index futures market.

Influence of institutional investor heterogeneity on stock liquidity and its underlying liquidity channels

Influence of institutional investor heterogeneity on stock liquidity and its underlying liquidity channels

Influence of institutional investor heterogeneity on stock liquidity and its underlying liquidity channels

Influence of institutional investor heterogeneity on stock liquidity and its underlying liquidity channels

Determinants of the exit value in European venture capital-backed technology startups

Purpose This study aims to analyze the impact of different exit alternatives, investor presence and founders’ human capital on the exit value of European venture capital (VC)-backed high technology startups. Design/methodology/approach The empirical analysis is based on a sample of 107 European firms that obtained an exit through Merger&Acquisition (M&A) or an initial public offering (IPO) between 2010 and 2017, backed by VC investors. Findings This study provides empirical evidence on how different exit alternatives, investor heterogeneity and founders’ human capital may affect the exit value of European VC-backed startups. Exiting through an IPO and retaining a larger equity stake are positively correlated with the exit value. The presence of business angels and non-governmental VC firms is associated with larger valuations. Founders’ previous education was positively correlated with the exit value. Originality/value Exit strategies in technology startups are essential to capitalize investors’ efforts and reinvest cash into new ventures, supporting the development of entrepreneurial ecosystems and countries’ competitiveness. The results of this study provide interesting hints for policymakers and contribute to an in-depth understanding of the drivers of exit valuation for startups.

Beyond Home Bias: International Portfolio Holdings and Information Heterogeneity

Abstract We show that international portfolios reflect the underlying heterogeneity in investors’ beliefs. Using data on the foreign sovereign debt holdings of European banks matched with their forecasts on future bond yields, we find that expecting higher returns and having more accurate forecasts are associated with larger bond holdings. Crucially, the elasticity of portfolio holdings to expected returns is increasing in the precision of the forecast, implying that investors optimally exploit comparative advantages in information production. We rationalize the results in a model in which partial information specialization arises endogenously by introducing a degree of unlearnable uncertainty about asset payoffs. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Dynamic asset pricing in delegated investment: An investigation from the perspective of heterogeneous beliefs of institutional and retail investors

What impact does delegated investment have on the price and volatility of the stock market? Traditional theoretical models believe that under benchmark-based incentives, institutional investment will push up stock prices and increase market volatility. This article extends traditional dynamic equilibrium models by incorporating investors' heterogeneous beliefs. In a continuous-time framework, we derive closed-form solutions to investors' dynamic portfolio strategies as well as the risky asset's equilibrium price and volatility. Numerical results show that heterogeneity in investors' beliefs can mitigate the risk of asset price bubbles, but renders the risky asset price more sensitive to cashflow news, increasing its volatility. While the convex incentive to institutional investors always boosts the risky asset price, it may increase or decrease risky asset volatility depending on whether institutional investors are more optimistic than retail investors. These theoretical results provide a new perspective from which to explain empirical findings and design future empirical studies.

Macroeconomic news announcements and market efficiency: Evidence from the U.S. Treasury market

• This paper investigates the impact of scheduled macroeconomic news announcements on the U.S. Treasury market’s efficiency. • This paper employs a robust method to construct market inefficiency measures using intraday data and controlling for microstructure noise. • The U.S. Treasury market is less efficient in the five-minute interval before news arrival. • Investor heterogeneity provides a possible explanation for the decreased market efficiency before scheduled news announcements. We investigate the impact of scheduled macroeconomic news announcements on the U.S. Treasury market’s efficiency. Using intraday data and controlling for microstructure noise, we employ a robust method to construct market inefficiency measures. We find that the U.S. Treasury market is less efficient in the five-minute interval before news arrival. Our findings are robust for different sample periods, macroeconomic news announcements, and market inefficiency measures. We find that investor heterogeneity provides a possible explanation for the decreased market efficiency before scheduled news announcements.