Market Beliefs Research Articles

A model of currency crises with heterogeneous market beliefs

This paper shows that the approach followed by Tamborini (2015) in analyzing and interpreting the euro area public debt crisis, based on the role played by agents characterized by heterogeneous market beliefs, can be applied also to the case of currency crises. By doing so, rather than considering the private sector as an atomistic player endowed with perfect information, and by considering a central bank that optimizes the amount of unsterilized inflow of foreign reserves in a Mundell-Fleming type speculative attack model, allows to explain the interest rates convex non-linearity that characterized, for example, a country like Italy during the 1992–93 EMS crisis.

Simulating Stablecoin Systems with Latent Market Confidence Index

There is a real demand for an alternative form of money, with intrinsic price stability in the system. In this paper, we examine a family of stablecoin that is intended to be used as a medium of exchange. We simulate an agent-based trading environment to study the stabilization mechanism of growth-collateralized stablecoin design with elastic money supply through bond auction and liquidation. Our model explicitly studies the endogenous demand dynamics for stablecoin when the system is subject to an exogenous price shock. In particular, we introduce a latent market confidence indicator that models the feedback loop between demand and price, where different agent types carry out different trading strategies and update their market beliefs as a function of market price and volatility. Through our simulation, we have found that the market confidence indicator responds to both a level effect and a variance effect of the stablecoin price movements. The increased variance in the excess demand ratio implies high market sensitivity, in which the system is reactive and beliefs are updated quickly to stabilize towards parity. Further, the demand for bonds as a derivative of the excess demand ratio for the stablecoin during the stabilization process has a strong impact on the variance of the bond queue. We believe by enacting the stabilization mechanism of bond auction or liquidation earlier on, the stability overall in the system can be improved.

Formation of Market Beliefs in the Oil Market

Oil traders find it challenging to process all information and choose which sources to follow. Inventories represent a perfect source, as they provide important information regarding real agents’ intertemporal decisions and can easily be observed in real time. However, inventories do not contain full information about the state of the oil market. We show that financial traders fail to acquire additional information and treat inventories as a sufficient statistic. As a result, the financial market fails to distinguish realized shocks from news shocks, and treats all shocks as persistent. To confirm this hypothesis, we use oil inventory announcements to identify market inventory surprises; and we estimate a model of the joint dynamics of returns and return volatilities around announcements using high frequency data on oil futures contracts with short and long maturities.

Private conservation funding from wildlife tourism enterprises in sub-Saharan Africa: Conservation marketing beliefs and practices

Conservation finance in many African countries relies heavily on tourism. Some commercial tourism companies provide substantial funding for private reserves, communal conservancies, and public protected areas, and for anti-poaching, breeding, and translocation programs. They also provide local employment, which generates community support for conservation. To generate funds, they must attract clients. This relies on marketing, which we analysed using staff interviews, marketing materials, and client comments. We found that they market: wildlife viewing opportunities first; luxury and exclusiveness second; and conservation projects third. They focus on flagship species such as the African big cats, and they market directly to tourists, and to specialist rather than generalist travel agents. In their view, conservation projects influence purchases significantly for some clients, but not for the majority, nor for travel agents. Therefore, maximum contributions to future conservation finance can be achieved through differential marketing to these two groups. Mainstream marketing is targeted at tourists who want the best wildlife viewing in the greatest comfort. Conservation marketing is targeted at tourists who purchase products that contribute to conservation. If these tourists were identified during marketing and booking, then conservation tourism enterprises could notify conservation trusts to seek donations.

Do Survey Probabilities Match Financial Market Beliefs?

ABSTRACTThis article considers whether survey respondents' views regarding the likelihood of stock index returns exceeding specific thresholds are comparable to market views indicated by index options with strikes at analogous thresholds. It is motivated by the observation that the wording used to elicit subjective beliefs in surveys about expected future returns resembles the question a purchaser of a call option might ask. Building on this association, the authors document a similarity between the views of survey respondents and those of financial market participants as measured through call options, although the association is not 1-for-1. They find a closer association for those demonstrating a better understanding of the laws of probability, suggesting that numeracy affects the accuracy of an elicited response.

Productivity, institutions, and market beliefs: three entrepreneurial interpretations

PurposeInspired by the debates among economists about the role of beliefs and informal institutions in economic development, the purpose of this paper is to derive and test different hypotheses about the ways beliefs about the market economy, institutions and policies, and productive entrepreneurship are intertwined.Design/methodology/approachThe paper derives from the literature three hypotheses unified around the idea of (political, cultural, and market) entrepreneurship. The paper then tests these hypotheses by running various country-level regressions intended to check the relationships between formal institutions and policies (measured by World Governance Indicators and by the Economic Freedom of the World index), productive entrepreneurship (measured by total factor productivity form the Penn World Table), and different kinds of market beliefs from the World Values Survey (WVS).FindingsThe sociological hypothesis says that more pro-market beliefs provide incentives for innovation by recognizing entrepreneurship as a dignifying activity. The political hypothesis says that people with more pro-market beliefs will demand, and therefore live with, more pro-market institutions and policies. The “Schumpeterian” hypothesis says that it is market institutions that make it possible for entrepreneurs to run against anti-market beliefs, and innovate. The results support the Schumpeterian hypothesis, mainly because market beliefs predict institutions and policies as well as productivity very poorly, while formal institutions and policies make a much better job of this.Originality/valueThe paper contrasts three different hypotheses concerned with the broader consequences of political, cultural, and market entrepreneurship and tests them by making use of the time structure of the observations found in the WVS.

A piaci intézmények megelőzik a piaci eszméket: országkeresztmetszeti teszt

A tanulmány a kultúra, a gazdasági növekedés és az intézmények viszonyát vizsgáló irodalomból vezet le hipotéziseket a piaci eszmék (beliefs), a piaci intézmények és a termelékenység viszonyára vonatkozóan, és országkeresztmetszeti adatokon teszteli azokat. Rámutat egyrészt, hogy a három tényező ok-okozati kapcsolatára felírható négy hipotézis mindegyikének van közgazdasági irodalma, amennyiben a piaci eszméket a kultúra részének tekintjük. Másrészt, azt kihasználva teszteli a hipotéziseket országkeresztmetszeti adatokon, hogy azok különböző változókat tekintenek exogénnek. A piaci eszmék mércéi a World Values Survey egyéni adatain futtatott regressziókban szereplő ország-dummyk koefficiensei. A teszt azon két hipotézisnek ad igazat, miszerint az intézmények exogének, nem a piaci eszmék. Journal of Economic Literature (JEL) kódok: L26, O43, P16

Do the central bank actions reduce interest rate volatility?

This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of this decision published one week later. Unlike related papers, we measure the market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompass market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both the decisions about the target rate and the communication event reduce the interest rate volatility.

On the optimality of coupon books

Our research was motivated by the challenge that a discount airline can set prices below traditional levels. One possible response for the traditional airline is to offer a book of coupons at a fixed price, in an attempt to retain or even increase market share. Offering coupon books is a way to induce changes in customer buying practices. Here we assume that each customer acts strategically in deciding whether or not to switch airlines and whether to buy the coupon book or the regular tickets. Other than price, the number of coupons in the book provides a way to segment the market. Airlines usually have data on circumstances where no coupon books were offered, but they generally do not have the luxury of experimenting by offering coupon books and gauging the response. The focus for this work is therefore: using only the data that is currently available (from the non-coupon case), are there key indicators that can help an airline decide whether or not to offer coupon books? We demonstrate that the crucial factor is the company’s current market share, and we show how to establish a threshold market share above which coupon books should not be offered. This becomes useful when advising a manager on a course of action, as the decision can be based on knowledge of current market share and beliefs about future market share. We show that there can be a broad region in which a manager can tolerate the give and take involved in behavioral and group decision making.

Robust Trading for Ambiguity-Averse Insiders

In an asset market with explicit trading rules we characterize the trading activity of an ambiguity-averse insider who faces Knightian uncertain over other market participants’ beliefs and implements a robust trading strategy. Such insider employs a max-min choice mechanism, so that in any round of trading she selects as her market order that which maximizes her expected profits against those market beliefs which penalize her most. Her trading strategy is equivalent to that of a risk-averse insider who does not face any Knightian uncertain and possesses risk-sensitive recursive preferences. As she finds it optimal to trade more aggressively and reveal her private information at a faster pace than her risk-neutral (expected-profit maximizer) counterpart, we find that ambiguity-aversion is beneficial to the efficiency of the market.

Promoting a Reputation for Quality

A firm builds its reputation not only by investing in the quality of its products, but also by controlling the information consumers can see. I consider a model in which a firm invests in both product quality and in a costly signaling technology in order to build its reputation, the market's belief that its quality is high. The firm influences the rate at which consumers’ receive information about quality: the firm can either promote, which increases the arrival rate of signals when quality is high, or censor, which decreases the arrival rate of signals when quality is low. I study how the firm's incentives to build quality and signal depend on its reputation and current quality. The firm's ability to promote or censor plays a key role in the structure of equilibria. Promotion and investment in quality are complements: the firm has stronger incentives to build quality when the promotion level is high. Costly promotion can, however, reduce the firm's incentive to build quality; this effect persists even as the cost of building quality approaches zero. Censorship and investment in quality are substitutes. The ability to censor can destroy a firm's incentives to invest in quality, because it can reduce information about poor quality products.

Optimal Reporting Systems with Investor Information Acquisition

This paper analyzes a manager’s optimal ex-ante reporting system using a Bayesian persuasion approach (Kamenica and Gentzkow (2011)) in a setting where investors affect cash flows through their decision to finance the firm’s investment opportunities, possibly assisted by the costly acquisition of additional information (inspection). I examine how the informativeness and the bias of the optimal system are determined by investors’ inspection cost, the degree of incentive alignment between the manager and investors, and the prior belief that the project is profitable. I find that a mis-aligned manager’s system is informative only when the market prior is pessimistic and is always positively biased. As investors’ inspection cost decreases, this bias decreases and the optimal system becomes more conservative. In contrast, a well-aligned manager’s system is fully revealing when investors’ inspection cost is high, and is counter-cyclical to the market belief when the inspection cost is low: It is positively (negatively) biased when the market belief is pessimistic (optimistic). I explore the extent to which the results generalize to a case with managerial manipulation and discuss the implications for investment efficiency. Overall, the analysis describes the complex interactions among determinants of firm disclosures and governance, and offers explanations for the mixed empirical results in this area.

Limits to Auditor Reputational Incentives

Why do reputable audit firms fail? This paper provides a formal theory of auditor reputation formation. Even under well-functioning reputation mechanisms, an auditor with a strong reputation has incentives to shirk. Above a threshold-reputation, the market belief about the auditor’s ability dissipates slowly, leading to low audit quality. Reputation incentives weaken further under fee competition in audit markets. The results are robust under contigent fees for auditors.

De gré ou de force : le microcrédit comme dispositif néolibéral

Le secteur du microcredit a fait face a plusieurs crises d'impayes ces dernieres annees. A partir d'enquetes menees en Inde, au Maroc et en Republique dominicaine, cet article montre que ces crises n'ont en rien ebranle l'un des mythes a l'origine de ces crises : la croyance en les capacites autoregulatrices par le marche. L'objectif de croissance reste prioritaire (meme si c'est a des degres divers selon les contextes) et se traduit a la fois par des pratiques actives de demarchage (il ne s'agit plus de repondre a une demande, mais de la creer) et une focalisation sur un segment finalement tres restreint de la clientele, celle qui a deja fait ses preuves. Une lecture de ces crises en termes d'economie politique permet egalement de resituer le microcredit dans l'evolution des politiques dites de « developpement » axees sur l'inclusion financiere. En normant les comportements des populations, le microcredit apparait alors comme revelateur d'un dispositif neoliberal au sens de Michel Foucault.

The Psychological Backstage of the Herd Behavior in the Financial Markets and the Dynamics of the Cognitive TTtonnementt to Market Beliefs

This paper investigates one aspect of the herd behavior in financial markets: the cognitive mutual interaction among professional agents. Professional agents are in continuous contact and exchange information and interpretations in order to develop their expectations. We hypothesized that this exchange is very widespread and could grow in crisis situations. Data demonstrate the correctness of our hypothesis. In the second part of the paper we study a mathematical model of agents’ network in order to better comprehend the dynamics of market beliefs. The linear difference equation model shows how, under certain conditions, the expectations of financial agents can converge to a unique belief, in spite of initial differences.

Shareholder voting and merger returns

Using a sample of 384 shareholder meetings, I investigate whether shareholder votes on mergers and acquisitions in both target and acquirer firms are related to announcement day abnormal returns and whether the voting outcome has implications for the short- and long-run merger performance. I find that shareholder voting dissent is negatively related to both abnormal returns upon merger announcement and recommendations by the Institutional Shareholder Services. The former relationship is stronger for target firms and only borderline significant for acquirer firms. Overall, shareholders seem to take both advisor opinions and market beliefs into account when taking their voting decision. I also find that cumulative abnormal returns on the meeting date are strongly positively related to voting dissent. The observed relationship holds only for mergers with a long negotiation period, suggesting that in these mergers a higher fraction of residual uncertainty is resolved with a “pass” vote. Furthermore, I find that voting dissent is negatively related to long-run abnormal merger performance, suggesting a predictive power of merger votes.

Cheap Talk and the Efficacy of the ECB's Securities Market Programme: Did Bond Purchases Matter?

In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields moved down, independent of the size of the ECB's purchases or even if the ECB conducted any purchase at all that week. In all, we conclude that the ECB's SMP influenced yields through a confidence channel rather than through any direct purchase effect. In the appendix to this paper we provide a detailed timeline of SMP purchases and market beliefs about purchase timing.

Cheap Talk and the Efficacy of the ECB’s Securities Market Programme: Did Bond Purchases Matter?

In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields moved down, independent of the size of the ECB’s purchases or even if the ECB conducted any purchase at all that week. In all, we conclude that the ECB’s SMP influenced yields through a confidence channel rather than through any direct purchase effect. In the appendix to this paper we provide a detailed timeline of SMP purchases and market beliefs about purchase timing.

Dynamic cointegrated pairs trading: Mean–variance time-consistent strategies

Cointegration is a useful econometric tool for identifying assets which share a common equilibrium. Cointegrated pairs trading is a trading strategy which attempts to take a profit when cointegrated assets depart from their equilibrium. This paper investigates the optimal dynamic trading of cointegrated assets using the classical mean–variance portfolio selection criterion. To ensure rational economic decisions, the optimal strategy is obtained over the set of time-consistent policies from which the optimization problem is enforced to obey the dynamic programming principle. We solve the optimal dynamic trading strategy in a closed-form explicit solution from a nonlinear Hamilton–Jacobi–Bellman partial differential equation. This analytical tractability enables us to prove rigorously that cointegration ensures the existence of statistical arbitrage using a dynamic time-consistent mean–variance strategy via asymptotic analysis. This provides the theoretical grounds for the market belief in cointegrated pairs trading. Comparison between time-consistent and precommitment trading strategies for cointegrated assets shows the former to be a persistent approach, whereas the latter makes it possible to generate infinite leverage once a cointegrating factor of the assets has a high mean reversion rate.

Strengthening Karl Polanyi’s Concepts of Reciprocity, Double Movement, and Freedom with the Assistance of Abductive Logic

:My purpose here is to strengthen Karl Polanyi’s work through critique of and extension to abductive processes. Polanyi presented history woven into a new paradigm for analysis of socioeconomic systems, demonstrated discovery similar to abductive processes, and extended abduction into a holistic context. One of Polanyi’s most important contributions to socioeconomic analysis is the explanation of three integrated network models of socioeconomic reciprocity. They are coadjuvancy, redistribution, and market exchange. Polanyi extended abductive reasoning in two ways. First, he extended it beyond the cognitive logic of a person to inferences and societal belief changes of institutions. Second, he showed that, in the real world, beliefs are not only fixed like an abductive process, they are fixed in law. Throughout Polanyi’s historical presentation, market beliefs are being revised, thus serving as a demonstration of the abductive process. I make both positive and negative critique of a number of Polanyi’s concepts, with special attention to reciprocity, the double movement, and freedom. This critique and abduction extension strengthens Polanyi’s paradigm for future socioeconomic analysis with his integrative network models.