Market Beliefs Research Articles

Gender, motivation and labour market beliefs in higher education choices

We examine relationships between motivations towards higher education choices, gender and beliefs about the financial consequences of these choices. We control for home background, school type and students’ expectations of grades they will achieve at age 16. We use a unique individual-level UK data set from a random sample of schools with a student sample size of 5012. These motivations are coded on six-point Likert scales so our modelling approach is by means of ‘multivariate ordered logit’ regressions. Boys express a much stronger motivation towards private financial gain whilst girls express stronger motivation towards occupational status and contributions towards society. We also find strong positive associations between motivation towards personal financial gain and beliefs about the financial value of a higher education. Our results support a multi-stranded theory of motivation towards higher education that takes account of beliefs about the external environment as well as self-beliefs about future academic achievement.

Quid Pro Quo? Corporate Returns to Campaign Contributions

Scholars, pundits, and political reformers have long worried that corporations distort public policy and subvert the will of the electorate by donating to politicians. Well-publicized anecdotes notwithstanding, whether and how much corporations actually benefit from supporting political candidates remains unknown. To systematically address this question, we utilize two complementary empirical approaches that isolate the monetary benefits a company derives from a favored candidate winning office. First, we use a regression discontinuity design exploiting close congressional, gubernatorial, and state legislative elections. Second, we leverage within-campaign changes in market beliefs about the outcomes of US Senate races. We find no evidence that corporations benefit from electing candidates supported by their PACs, and we can statistically reject effect sizes greater than 0.3% of firm value. Our results suggest that corporate campaign contributions do not buy significant political favors—at least not on average.

Sustainability worldviews of marketing academics: A segmentation analysis and implications for professional development

The epistemology of the business school has been argued to be a large barrier towards the integration of sustainability in education and research. This research aims to shed light on the fundamental marketing and consumption assumptions marketing academics hold. In an international online survey of 437 marketing academics, the research found four clusters of sustainability worldviews and key demographic differences (based upon sex and academic rank) in sustainability, consumption and marketing beliefs. This research provides a reflection of the disciplines’ theoretical and philosophical beliefs in relation to sustainability. Such reflection has implications for the future of sustainability within the marketing academy, as well as an understanding of the conceptualizations of sustainability graduates receive from their education. Based upon the findings, suggestions are provided about how to encourage sustainability research and teaching within marketing departments and how professional development activities in business schools should integrate sustainability content.

Investor Sentiment in an Artificial Limit Order Market

This paper examines the under/overreaction effect driven by sentiment belief in an artificial limit order market when agents are risk averse and arrive in the market with different time horizons. We employ agent-based modeling to build up an artificial stock market with order book and model a type of sentiment belief display over/underreaction by following a Bayesian learning scheme with a Markov regime switching between conservative bias and representative bias. Simulations show that when compared with classic noise belief without learning, sentiment belief gives rise to short-term intraday return predictability. In particular, under/overreaction trading strategies are profitable under sentiment beliefs, but not under noise belief. Moreover, we find that sentiment belief leads to significantly lower volatility, lower bid-ask spread, and larger order book depth near the best quotes but lower trading volume when compared with noise belief.

Information‐rich wheat markets in the early days of COVID‐19

AbstractThis paper uses the information implicit in commodity futures and options prices to infer market beliefs about the impact of early‐stages COVID‐19 on commodity market fundamentals. The particular commodity examined is soft red winter (SRW) wheat, and the timeframe is early February to late March 2020. The analysis highlights various adjustments in the cash and futures price of SRW wheat in light of surging short‐run demand from consumer hoarding of staple food products, and a weakening long‐run market from growing wheat stocks and an emerging global recession. This split is causing the forward curve to flatten and basis levels to invert. The change over time in the price of options on wheat futures reveals increased price volatility in response to growing uncertainty about the COVID‐19 impacts. Similarly, changes in the skewness of the option's volatility smile illustrate a shift in traders’ perception about risk in the right versus left tail of the price distribution.

Financial Performance, Reputation, and Firm Value: Empirical Evidence of Non-financial Companies Listed in Indonesia Stock Exchange

The research aims to investigate (1) the influence of financial performance on reputation, (2) the influence of financial performance on firm value, (3) the influence of reputation on firm value, (4) the influence of financial performance on firm value with reputation as a mediating variable. The sample of this study consisted of 108 non-financial companies listed in the Indonesia Stock Exchange during 2016-2018 which was selected using a purposive sampling method. The analysis method in this study uses path analysis. The reputation measurement used the corporate image index (CII) published by Frontier Consulting Group. The results showed that (1) financial performance has a positive and significant influence on company reputation, (2) financial performance has a positive and significant effect on firm value, (3) reputation has a positive and significant influence on firm value, (4) reputation mediates the influence financial performance on firm value. The implication of this research was the financial performance as a positive signal in improving the company's reputation which has an impact on increasing investor belief in the capital market.

The consistency of market beliefs as a determinant of economic freedom

Accepting the view that beliefs about the market determine the policies and institutions of economic freedom, this paper considers the cross-country consequences of the fact that these beliefs are not one-dimensional and they may be inconsistently distributed over these dimensions. The paper asks the question of whether cross-country differences in the consistency of market beliefs help explain the cross-country differences in areas of economic freedom, especially the contrasting cross-country pattern of the size of government and the legal system and property rights area. It shows that under some plausible conditions in a probabilistic voting framework, a higher consistency leads to higher economic freedom in some areas and lower economic freedom in other areas. Therefore, the concept of the consistency of market beliefs helps us understand why countries with higher economic freedom score for legal system and property rights usually have a lower economic freedom score for the size of government. Using Cronbach’s (coefficient) alpha of four different market beliefs as a measure of consistency in cross-country regressions, the paper finds that consistency is an explanatory factor of the two economic freedom areas.

Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality

We construct a model where people trade assets contingent on an observable signal that reflects public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to observed outcomes. We show that the distribution of the observed signal is described by a quasi non-ergodic process and that people continue to disagree with each other forever. Our model generates large wealth inequalities that arise from the multiplicative nature of wealth dynamics which makes successful bold bets highly profitable. The flip side of this statement is that unsuccessful bold bets are ruinous and lead the person who makes such bets into poverty. People who agree with the market belief have a low expected subjective gain from trading. People who disagree may either become spectacularly rich, or spectacularly poor.

Maturity Increasing Overreaction and Bond Market Puzzles

Long-term treasury yields are known to be (i) excessively volatile (Giglio and Kelly, 2018), (ii) highly sensitive to short-rate movements (Hanson et al., 2018), and (iii) highly predictable from non-priced factors (Duffee, 2013). I assess the possibility that these puzzles may be due to non-rational investor beliefs. Using survey data as well as market beliefs recovered from bond yields, I document that expectations about long rates overreact to news, relative to expectations about short rates. I show that introducing diagnostic expectations into an affine term-structure model yields such maturity increasing overreaction and reconciles the three puzzles. When benchmarked against external estimates of diagnostic distortions, this model accounts for (i) 80% of the excess volatility, (ii) 40% of the excess sensitivity of long rates, and (iii) excess-bond-returns predictability coming from past forecast revisions.

How Rational Are the Option Prices of Hong Kong Dollar Exchange Rate?

In this paper, we study the prices of the options on Hong Kong's linked exchange rate. The study was motivated by the apparent contradiction that options with strike prices outside the narrow trading band have positive prices. We developed a simple regime-switching model of the exchange rate and provided a formula for the prices of its options. The option pricing formula allows us to back out the implied probability of the failure of the linked exchange rate regime. With the option price data for the period from June 1, 2005 to July 31, 2018, we find that the market's belief about the likelihoods of the failure, as implied by the option prices, is too high to be justified by the possibility of the failure alone. This is first shown qualitatively, without using any model, with ratio of empirical over implied volatilities and the implied range of strike prices. Then, using the model, we find that, close to 40% of the sample period, the market thinks the failure probability is greater than 10%. When contrasted with the fact that the regime has not failed since 1983, the p-value of that event is less than 0.1%. Our finding suggests that, while the failure of the linked exchange rate regime is a significant risk factor, it cannot explain the risk premium seen in the option prices.

Who is the Best Fit? Ex-ante Beliefs about Auditor-Client Compatibility in the Audit Process

This paper emphasizes the importance of ex-ante beliefs for auditor-client compatibility. High compatibility is characterized by the efficient transformation of audit effort into audit quality. Consequently, common intuition suggests that the highest compatibility guarantees the best outcome to the audit process. However, from an ex-ante perspective, the auditor-client compatibility is unknown to all market participants. In our model, we show that auditors with uncertain compatibility can outperform auditors whose type is known since a successful (unsuccessful) audit has a stronger positive (negative) impact on the market's beliefs if the auditor still has to prove her fit. Thus, given that litigation is rather moderate, auditors with uncertain compatibility have stronger effort incentives than certainly compatible types, which enables them to generate a higher audit surplus. The results highlight that litigation and market mechanisms provide a unique set of incentives for each auditor and cannot be viewed as perfect substitutes.

The Race for Online Reputation: Implications for Platforms, Firms and Consumers

Online reputation (reflected in consumer ratings) has become a key marketing-mix variable in the digital world. We consider a market consisting of competing firms that participate in a platform such as Expedia or Yelp. Each firm exerts effort to improve its ratings, but in doing so, also influences the mean market rating. The sales of a firm are influenced by its own ratings and the mean rating of the firms in the market. An equilibrium analysis of the mean market rating reveals several insights. A more heterogeneous market (one where the parameters of the firms are very different) leads to a lower mean market rating and higher total profit of the firms in the market. Our results can inform platforms to target certain firms to join: Growing the middle of the market (firms with average ratings) is the best option considering the goals of the platform (increase total profit of the firms) and the other stakeholders, namely, incumbents and consumers. For firms, we find that a firm's profit can increase from an adverse event (such as, a reduction in sales margin, or an increase in the cost of control) depending on how other firms in the market are affected by the event. Our findings are particularly significant for platform owners who could benefit from growing the platform in a strategic manner. We model each firm's decision problem as a stochastic control problem where the objective is to maximize discounted profit over a planning horizon. These control problems are connected through a common market belief that represents the mean rating of the firms in the market. The joint actions of the firms generate a mean market equilibrium. We prove that such an equilibrium exists, is unique, and use a simple algorithm to compute its value.

SENTIMENT MARKET ANALYSIS ON REPLACEMENT ANNOUNCEMENT OF CHIEF EXECUTIVE OFFICER (CEO)

This study examines the market reaction to the announcement of Chief Executive Officer (CEO) measured by abnormal return. The study sample consisted of 55 CEO turnover announcements using the t-test to test information content of the announcement. The author groups the changes into two factors: (1) change process (routine and non-routine) and (2) substitute origin (inside and outside). The market reacts significantly positively to the announcement of CEO turnover routinely with the origin of the replacement from inside (inside) the company. Different reactions occur in the announcement of routine outside and non-routine insidediary CEO turnover where announcements are responded negatively and significantly. The market does not react to the announcement of non routine outside CEO changes. These results show that investors in Indonesia react positively to routine CEO turnover inside because investors believe that new CEOs will continue their strategy and leadership style and have lower levels of uncertainty. Negative reactions to routine outside CEO turnover are caused by the market belief that the successor will not continue the previous CEO's strategy and has a high degree of uncertainty. The cause of a negative market reaction to the announcement of a non-routine inside CEO turnover is that a replacement CEO will continue the old leadership style and jointly be responsible for the company's poor performance.

The Domestic Tax Code, Foreign Exchange Dynamics and Flow of Funds across Countries

Integrating tax methodology and foreign exchange rates dynamics, and utilizing Miller and Scholes [1] framework, we are able to derive a testable algorithm that identifies financial flow of funds across countries, which in turn leads to short term changes in exchange rates. In this model we are going to identify changes in the flow of funds, directed toward financial investments, lending or borrowing, between two countries, and thereby the short term changes in the foreign exchange rate that solely stems from expected changes in the tax codes. Thus, expected change in the foreign exchange rate becomes an endogenous variable, while the common view in the literature is that expected change in foreign exchange rates that differs from the market consensus is the trigger for flows of funds across countries. Alternatively, by using the above-mentioned algorithm, one can imply the market beliefs regarding expected changes in the tax code.

The Dynamics of Households' Stock Market Beliefs

We analyse a long panel of households’ stock market beliefs to gain insights into the nature of their expectations formation processes. We classify respondents into one of five groups based on their data and estimate group-wise models of expectations formation. Two of the groups are at opposite extremes in terms of optimism: Pessimists who expect substantially negative returns and financially sophisticated individuals whose expectations are close to the historical average. Two groups expect returns around zero and differ only in how they respond to information: Extrapolators who become more optimistic following positive information and mean-reverters for whom the opposite is the case. The final group is characterised by poor probability numeracy; its individuals are not willing or able to quantify their beliefs about future returns. None of the estimated belief formation processes passes a rational expectations test.

Verbal interventions and exchange rate policies: The case of Swiss franc cap

We ask whether verbal interventions by the Swiss National Bank (SNB) affected market beliefs in the desired direction during the period from 2011 to 2015, when the SNB imposed a cap on the Swiss franc at 1.20 against the euro. A verbal intervention was a speech by a member of the SNB Governing Board containing the wording “utmost determination” and/or “unlimited quantities”. We show that these verbal interventions lowered uncertainty regarding the future value of euro/Swiss franc exchange rate and steered market beliefs toward franc depreciation, therefore reinforcing the credibility of the Swiss franc cap.

Strategic Withholding and Imprecision in Asset Measurement

How precise should accounting measurements be, if management has discretion to strategically withhold? We examine this question by nesting an optimal persuasion mechanism, which controls what measurements are conducted, within a voluntary disclosure framework a la Dye (85) and Jung and Kwon (1988). In our setting, information has real effects because the firm uses it to make a continuous operating decision, increasing in the market's belief. Absent frictions other than uncertainty about information endowment, we show that imprecision can reduce strategic withholding but always decreases firm value. We then examine plausible environments under which, by contrast, there is an optimal level of imprecision featuring coarseness at the marginal discloser. We offer additional implications in the contexts of enforcement against strategic withholding and financing with collateralized assets.

Rhetoric and Economics, Analysis and History

Rhetoric and Economics, Analysis and History

A Forward-Looking Ricardian Approach: Do land markets capitalize climate change forecasts?

The hedonic pricing method is one of the main approaches used to estimate the economic value of attributes that affect the market price of an asset. This method is routinely used in environmental economics to derive the economic valuation of environmental attributes such as air pollution and water quality. For example, the “Ricardian approach” is based on a hedonic regression of land values on historical climate variables. Forecasts of future climate can then be employed to estimate the future costs of climate change. We show that this approach is only valid if current land markets ignore climate forecasts. While this assumption was defensible decades ago (when this literature first emerged), it is reasonable to hypothesize that information on climate change is so pervasive today that markets may already price in expectations of future climate change. Indeed, we show empirically that agricultural land markets in the United States now capitalize expectations about future climate change. We derive a straightforward empirical correction to the standard Ricardian approach (called the “Forward-Looking Ricardian Approach”) that can be implemented with readily available data. Accounting for market beliefs decreases the estimated magnitude of climate change damages by 50%–62%.

Robust trading for ambiguity-averse insiders

Abstract 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.