Working Papers

Losers Buy Beta  [SSRN] [link]

Using trading data from Finland and the US, I empirically show that investors tend to buy riskier stocks following realized losses. The measure of risk that the investors seem to pay attention to is the market beta of a stock. This behavior of buying higher beta stocks after a realized loss is observed in institutional as well as individual investors, but is more pronounced among individual investors with lower expertise, who on an average buy a new stock with up to 15% higher beta than that of the old stock they were holding. For an agent with utility consistent with prospect theory, this behavior emerges as the optimal response to her problem of maximizing utility within a mental account. Furthermore, this behavior can aggregate up during market downturns and cause return predictability in high beta stocks. With this insight, I suggest a modification to the betting against beta trading strategy that can improve the Sharpe ratio more than twofold.

Estimating the Reference Points of Investors with the Disposition Effect   [link]

We estimate the reference points of individual investors that exhibit the disposition effect using proportional hazard models to fit their stock selling decisions. We find that while the likelihood function jumps significantly around a reference point of zero, the average maximum likelihood reference point is a positive number, generally around 60 to 190 basis points. Further, in most cases there is a higher secondary reference point around 300 basis points. This appears to stem from heterogeneity of reference point across individuals. We identify some characteristics that explain variation in reference point across individuals. We also find that quarterly primary reference points are correlated with past bond yield changes, past stock market return and individual experience of previous realized profits.

Disposition Effect and Market Timing [link]

This paper finds evidence that despite disposition effect investor decision to sell or hold on to stock is rational in the short run. First of all, running hazard models on a large data-set spanning over fourteen years, I find that the decision to sell a stock is more related to its short term return jump, rather than its overall return over the entire holding period. Moreover, individuals’ decision to sell/hold a stock is extremely well timed in the short run (weekly horizon). On average, individual investors are successful at timing their selling/holding decisions of individual stocks, both with respect to the market performance and the overall performance of their own portfolios.

Consumption Based Asset Pricing Adjusting for Measurement Error [link]

This paper presents a modification to the testable Euler equation in the form of an adjustment term due to additive measurement error in consumption data. The error in consumption data has the potential to magnify the equity premium puzzle in a CRRA framework and including the adjustment term leads to a reduction in the estimated risk aversion coefficient. The paper also empirically estimates a ballpark figure for the variance of measurement error and demonstrates a significant resolution of the puzzle by including measurement error in the model. Using the correction term, with the standard consumption data from BEA, I solve the equity premium with a relative risk aversion coefficient of 2.6.

National identity predicts public health support during a global pandemic: Results from 67 nations [link]

The ongoing COVID-19 pandemic is a devastating global health crisis. Without a vaccine or effective medication, the best hope for mitigating virus transmission is collective behavior change and support for public health interventions (e.g., spatial distancing, physical hygiene, and endorsement of health policies). In a large-scale international collaboration (N = 46,769 across 67 countries), we investigated why people adopted public health behaviors and endorsed public policy interventions (e.g., closing bars and restaurants) during the pandemic (April-May, 2020). Results revealed that respondents who identified more strongly with their nation consistently reported engagement in public health behaviors and greater support for public health policies. We also found a small effect of political orientation, suggesting that left-wing individuals were more likely to endorse public health behaviors and support for public health measures than right-wing individuals. We discuss the implications of links between national identity, leadership, and public health for managing the COVID-19 and future pandemics.