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The IUP Journal of Behavioral Finance

March'12
Focus

Capital Asset Pricing Model (CAPM) gives a simple and elegant method of describing how the investors price assets in a rational world. It however fails to incorporate the human element.

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A Conceptual Framework of Behavioral Biases in Finance
50
Prospect Theory and Tunisian Banks’ Risk-Taking
50
The Impact of Level of Purchase Decision Involvement on the Investment Behavior of Mutual Fund Investors
50
Investment Decision Making: A Gender-Based Study of Private Sector Bank Employees
50
Evaluation of the Financial Ratio Capability to Predict the Financial Crisis of Companies
50
Price Discovery and Volatility Spillovers in Indian Spot-Futures Commodity Market
50
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A Conceptual Framework of Behavioral Biases in Finance

-- Khushbu Agrawal

The behavior of financial markets and decisions of individuals are many a time driven by various biases. This can be attributed to the tendency of humans to resort to shortcuts owing to the constraints on time and mental capacity to process unlimited information. Various researchers have made an attempt to classify these biases into various types. But these biases have been viewed in isolation, thereby ignoring the possibility of any interaction or relationship between them. This paper aims to provide a comprehensive view of the behavioral biases by taking into account such interactions and developing a conceptual framework that incorporates the antecedents or causes of the biases and their outcomes or consequences. It also explores the possibility of overcoming some of the biases. It is argued that certain biases reinforce each other. The strength of each bias is a function of several factors like the external environment and presence of other biases in the process. The paper concludes that behavioral biases have been and will continue to influence human judgement. Although it is possible to avoid some of the biases in specific situations, it is not possible to completely eliminate them.

Article Price : Rs.50

Prospect Theory and Tunisian Banks’ Risk-Taking

-- Nabila Zribi and Younes Boujelbène

The aim of this paper is to analyze bank’s risk-taking from a behavioral perspective. The paper addresses this issue through a special case: risk attitudes based on the prospect theory introduced by Kahneman and Tversky (1979) and Tversky and Kahneman (1992). According to this theory, agents usually underweigh the probable results compared to certain ones, which implies that agents are risk-averse when the gains are certain, and risk-seeking when losses are certain. In this respect, this paper analyzes the relationship between outcome variability and distance from target. Targets are defined as the median values of return variables. The results reveal that: in below target case, the results confirm the prospect theory; the distance from target is generally found to be negatively associated with the dispersion from the mean. In above target case also, the results do confirm the prospect theory; the distance from target is generally found to be positively associated with the dispersion from the mean.

Article Price : Rs.50

The Impact of Level of Purchase Decision Involvement on the Investment Behavior of Mutual Fund Investors

-- Sanjay Kr. Mishra and Manoj Kumar

This study investigates the impact of level of Purchase Decision Involvement (PDI) of Mutual Fund (MF) investors on their investment behavior through a survey of 268 MF investors. Overall the results suggest that the level of PDI significantly impacts the investment behavior of MF investors. Further, the results suggest significant difference in the width and depth of information search and information processing by low PDI MF investors and high PDI MF investors. Specifically, it is found that (a) during information search low PDI MF investors are likely to use fewer number of information sources to collect information, rely less on sources providing detailed information related to MFs (e.g., financial portal) and rely more on banks as a source of investment advice in comparison to high PDI MF investors; and (b) during information processing low PDI MF investors are likely to use information on a fewer number of attributes to compare MFs, and do not process MF-related attribute information in details in comparison to high PDI MF investors. The implications of the findings that are relevant to the marketing of MFs are also discussed.

Article Price : Rs.50

Investment Decision Making: A Gender-Based Study of Private Sector Bank Employees

-- Lalit Mohan Kathuria and Kanika Singhania

The fast growing Indian economy has led to higher income level and availability of new investment avenues. Government savings departments, banks, financial institutions and mutual fund houses are vying for a share in the savings of investors. Investors now have many options for making investments like debt instruments, stocks, mutual funds, gold, etc. With the role of women becoming increasingly important in the family as well as society, it becomes important to examine the investment behavior of women investors. The present study analyzes the level of knowledge regarding various investment avenues, select investment practices, and factors influencing investment decision making among male and female employees of private sector banks in a city of India. The study reveals that both male and female respondents were using magazines, Internet and TV channels as the three most important sources of awareness for collecting information about various investment alternatives. Also, male and female respondents were investing a larger portion of their savings into safe and risk-free investment avenues, like employee provident fund, public provident fund and life insurance policy.

Article Price : Rs.50

Evaluation of the Financial Ratio Capability to Predict the Financial Crisis of Companies

-- Fazlzadeh Alireza, Mohammadzadeh Parviz and Sheikhi Mina

This research evaluates the capability of financial ratios for predicting the financial crisis of companies. Predicting the financial crisis of institutions has been constantly the concern of different groups of users, because the final effectiveness of each decision has a direct relation to the accurate predicting of its consequences. One of the tools for predicting the financial crisis of companies is the use of financial ratios as independent variables and attaining some patterns for predicting financial crisis of companies. This research is aimed at presenting a model in a way suitable for Iran’s environmental conditions with a selection of 64 financial ratios for relatively predicting the financial conditions of companies in one, two and three years before bankruptcy. Analyzing the information of two groups, including that of 44 bankrupt and 56 non-bankrupt companies between 2003-2007, using the discriminant analysis, a final model was presented which was able to predict the financial situation of companies in the year of bankruptcy with an accuracy of 94% and in the years previous to the bankruptcy with an accuracy of more than 80%, showing the high potential of financial ratios for predicting.

Article Price : Rs.50

Price Discovery and Volatility Spillovers in Indian Spot-Futures Commodity Market

-- P Srinivasan

The present paper examines the price discovery process and volatility spillovers in Indian spot-futures commodity markets through Johansen cointegration, Vector Error Correction Model (VECM) and the bivariate EGARCH model. The study uses four futures and spot indices of the Multi Commodity Exchange of India (MCX), representing relevant sectors like agriculture (MCXAGRI), energy (MCXENERGY), metal (MCXMETAL), and the composite index of metals, energy and agrocommodities (MCXCOMDEX). Johansen cointegration test confirms the presence of long-term equilibrium relationships between the futures price and its underlying spot price of the commodity markets. The VECM shows that commodity spot markets of MCXCOMDEX, MCXAGRI, MCXENERGY and MCXMETAL play a dominant role and serve as effective price discovery vehicle, implying that there is a flow of information from spot to futures commodity markets. Besides, the bivariate EGARCH model indicates that although bidirectional volatility spillover persists, the volatility spillovers from spot to the futures market are dominant in case of all MCX commodity markets.

Article Price : Rs.50

 

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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Behavioral Finance