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Exploring Behavioral Finance: Insights on Market Anomalies and Risk Perception

This compilation of key papers in behavioral finance delves into various market anomalies, including the concepts of neglected risks, high-frequency trading impacts, and the dynamics of short selling. When examining value investing, mean reversion, and short-term momentum, the research highlights patterns such as the Ball-Brown effect and Fama-French theories. This exploration reveals how psychological biases, like overconfidence in glamour stocks and the tendency to underreact to earnings surprises, influence investor behavior and market outcomes.

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Exploring Behavioral Finance: Insights on Market Anomalies and Risk Perception

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  1. Behavioral Finance Economics 437

  2. Q-Group Papers • Shleifer, Gennaioli, Vishny – “Neglected Risks” • Kirilenko, Kyle, Samadi, Tuzun, “High Frequency Trading and the Flash Crash” • Karpoff, Lou, “Short Sellers and Financial Misconduct”

  3. Serial Correlation • Fama-French – “Value investing” • DeBondt-Thaler – “Mean reversion” • Jagdeesh-Titman – “Short term momentum” • Ball-Brown – “Earnings surprise under-reaction”

  4. Ball & Brown 1986 • Market “underreacts” to earnings surprises • Article generally ignored until Jagdeesh-Titman • Time span suggests that Ball-Brown effect may be the same thing as Jagdeesh-Titman

  5. Value Investing & Mean Reversion • Are They the Same Thing? (Stocks that are value stocks have low P’s; stocks that have fallen over the past five years have low P’s) • Lakonishok, Shleifer, Vishny, 1994 • Are value stocks riskier? Is that why they have higher returns? • Do investors have overconfidence in “glamour” stocks? • The article cites studies using date from other countries that support F-F and D-T • Haugen, Baker 1996 • Firm characteristics • A “generalized” F-F result

  6. Second Mid Term, Tuesday, April 12, 2011 • Anomalies • What are they? Biases generally • Prospect theory: based upon the idea that losses are more painful than equal-dollar gains are pleasureable. • All readings on syllabus for anomlies • Value-investing • Fama-French • Mean-reversion • DeBondt-Thaler • Short term momentum • Jegadeesh-Titman

  7. END

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