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A
Behavioral Defense of the FED Model
--
Michael Clemens
In
any balanced portfolio, investors need to assess the relative
attractiveness of equities and bonds, the usual asset classes
`competing' for funds. A widely used tool in asset allocation
decisions is the so-called FED. The critique of the FED
model has not always been fair and this paper, therefore,
presents a behavioral defense of the FED model. By combining
the FED model with the Capital Asset Pricing Model (CAPM),
it becomes evident that the FED model is able to detect
time variation in the equity risk premium and behavioral
biases in long-term earnings growth expectations. Assuming
that share prices are the sum of a fundamental value element
and a noise/sentiment element, then the use of statistical
tools such as confidence intervals will reduce potential
decision biases caused by noise/sentiment and thereby improve
the predictive power of the FED model. The results in this
paper suggest that the FED model does a better job at predicting
relative returns of stocks versus bonds than at predicting
absolute stock returns. By basing decisions only on data
points outside a predetermined confidence interval, the
predictive power is increased manifold, enhancing potential
gross returns and reducing transaction costs. The optimal
prediction horizon for the FED model appears to be 12-36
months, somewhat shorter than the 5-10 year horizon found
for the P/E mean reversion model proposed by Campbell-Shiller.
Thus, the FED model and the long-term P/E mean reversion
model are complementary models of return prediction, not
competing models.
©
2007 IUP . All Rights Reserved.
The
Disposition Effect Demonstrated on IPO Trading Volume
-- Adam Szyszka and Piotr Zielonka
The
disposition effect is known as the reluctance of investors
to realize losses and their eagerness to realize gains.
The aim of this research is to examine the impact of the
disposition effect at the aggregate (market) level. In order
to limit the number of factors affecting the selling decision
on the share exchange, the study was conducted on Initial
Public Offerings (IPO). The main factor determining the
volume of turnover on the first trading day should be the
initial rate of return. The results show that a higher turnover
volume is associated with a positive initial rate of return,
while a lower turnover volume is associated with a negative
initial rate of return. This phenomenon can be explained
by the disposition effect. The research was conducted on
the emerging market in Poland. The Warsaw Stock Exchange
(WSE), in 2006, was the second largest IPO market in Europe,
after London.
©
2007 IUP . All Rights Reserved.
Behavioral
Considerations in Cost Allocation
--
Ajay Kumar Pillai
The
issue of behavioral considerations in cost allocation has
been discussed and debated extensively in behavioral management
accounting literature. During the past few decades, researchers
have identified a number of behavioral dimensions for cost
allocation. This paper reports the results of an empirical
study designed to examine the important behavioral considerations
of cost allocations. The data for the study was collected
from finance managers using a questionnaire survey. The
empirical evidence identifies four behavioral considerations
which influence cost allocation. The relevance of developing
a more comprehensive understanding of the behavioral aspects
of cost allocation is becoming important, especially in
Indian companies.
©
2007 IUP . All Rights Reserved.
Behavioral
Finance and the Investment Decision-making Process in the
Brazilian Financial Market
--
Roberto Frota Decourt,
André Accorsi and José
Madeira Neto
This
article compares the investment simulations of the Brazilian
MBA students and physicians. The study indicates that the
process of making investment decisions is based on the `Behavioral
Economics' theory which uses the fundamental aspects of
the `Prospect Theory' developed by Kahneman and Tversky
(1979). The following effects have been tested and identified
using an investment simulator over the Internet: (1) the
endowment effect, which prevents the participants from selling
the received assets, even if better investment options are
available; (2) the disposition effect, which refers to the
pattern that people avoid realizing paper losses and seek
to realize gains; (3) fear of regret, which makes the participant
invest in previously rejected assets that had good valorization;
and (4) framing, which modifies the investment decision
depending on the perspective given to the problem. The conclusions
of this study are: (1) the endowment effect was effective
for physicians; (2) the disposition effect did not affect
the participants; (3) the fear of regret influenced the
decisions of MBA students; and (4) the framing modified
the investment decision of the physicians and MBA students.
©
2007 IUP . All Rights Reserved.
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