Date of Award
Spring 2023
Document Type
Dissertation
Degree Name
Doctor of Philosophy (PhD)
Department
Economics
First Advisor
Barberis, Nicholas
Abstract
This dissertation studies a range of topics in behavioral finance and macroeconomics. Thethree essays presented in this dissertation have the same goal of using nontraditional preferences or beliefs to explain puzzling facts in financial markets, which rational models fail to predict. Chapter 1 and Chapter 2 focus on the role of incorrect beliefs in determining equilibrium outcomes such as asset prices and aggregate consumption. Chapter 3 switches the focus to the China’s IPO markets and explores the implications of idiosyncratic skewness on several IPO anomalies including huge initial return, long-term return reversal and high turnover rate. Chapter 1 The Role of Beliefs in Asset Prices: Evidence from Exchange Rates explores a central question in finance: why asset prices sometimes under-react and sometimes overreact. This chapter uses the exchange rate market as a natural lab to answer this question. Motivated by evidence of systematic forecast errors by market participants and professional forecasters, we construct a model of exchange rate determination. Our model is able to explain the forward premium puzzle, in a manner consistent with the survey evidence, in addition to a number of additional puzzles that existing models have struggled to simultaneously explain. These include the initial under-reaction and delayed overreaction of currencies in response to monetary news; positive short-horizon and negative long-horizon autocorrelations of currency excess returns; and the lower return predictability of interest rate differentials for UIP trades implemented with longer maturity bonds. Our model is also useful for understanding the strong relationship between survey-based measures of macroeconomic news and exchange rates despite the weak relationship between macroeconomic fundamentals and exchange rates, the persistence of subjective beliefs, and the seeming reversal of the failure of UIP in recent years. The results highlight the important role that investors’ beliefs may play in exchange rate behavior. In Chapter 2 Consumption with Imperfect Income Expectations, we answer an important question in macro-finance: why aggregate consumption is excessively smooth and excessively sensitive. Using survey forecast data, this chapter documents several stylized facts abou forecasters’ beliefs on income and consumption, and aggregate consumption growth: (1) survey-based income forecast at consensus level is highly correlated with consumption growth; (2) consensus income and consumption growth forecast errors under-react to macro news shocks and (3) consensus income forecast error and consumption growth under-react initially and overreact subsequently in response to main business cycle shocks. Motivated by these evidence, we propose a model of equilibrium consumption determination where agents learn the exogenous latent permanent income process and extrapolate the past income realizations. Our model can generate the behavior of consumption that the rational-expectation Permanent Income Hypothesis fails to predict: excess smoothness and excess sensitivity of aggregate consumption, and negatively correlated consumption growth and past income change in medium run. Chapter 3 Skewness Preference and IPO Anomalies in China investigates several anomalies in IPO market that produce high initial return, long-term return reversal and high turnover rate from the perspective of investors’ desire to gamble (skewness preferences). Based on the Cumulative Prospect Theory, this chapter theoretically and empirically verified that there is a significant impact on first day and long-term returns. Using all issued IPO between 2009 and 2012 as a study sample, the empirical results show that the increase of a standard deviation of skewness preference, the first day returns increase by 5.478%. Moreover, when the market environment is favorable, the positive sentiment of investors will make the effect of skewness preferences stronger. In the long run, the stronger the expected skewness is, the more negative the long-term risk premium is, and the lower the probability of new shares that institutional investors continue to hold. In addition, industry assignments, financing scales and issue prices can explain some variations in investors’ skewness preferences.
Recommended Citation
Wu, Tianhao, "Essays in Behavioral Finance" (2023). Yale Graduate School of Arts and Sciences Dissertations. 1040.
https://elischolar.library.yale.edu/gsas_dissertations/1040
