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Article
Publication date: 4 September 2020

Francesco Strati

The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a…

Abstract

Purpose

The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a sufficient condition for deleveraging.

Design/methodology/approach

Theoretical approach with neutral deleveraging.

Findings

Findings of the study are defined sufficient conditions for a behavioral rational bubble's formation in a market of collateral and the subsequent deleveraging. The crowd-in effect of the representative bubble is caused by errors in extrapolating information and thus by representativeness, while the crowd-out effect of deleveraging is set off by reverting to a rational heuristic.

Research limitations/implications

The limit is that it is a homogeneous expectations approach, the implication is that cannot be rational speculation.

Practical implications

Even in a simple model of homogeneous expectations a bubble may arise with serious effect on the demand side: models that detect just rational mispricings cannot account for behavioral components that have financial and real effects.

Originality/value

The paper defines how deleveraging may occur even in case of homogeneous expectations. The latter should not be seen just as a limit but also as a signal of the importance of being aware of behavioral components.

Details

Review of Behavioral Finance, vol. 13 no. 5
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 1 March 1992

G. Franke

This paper provides some justification for the observation that managers hedge transaction and translation risk through financial contracts and not economic risk as recommended by…

Abstract

This paper provides some justification for the observation that managers hedge transaction and translation risk through financial contracts and not economic risk as recommended by economists. One reason for the observed behavior is uncertainty in the perception of economic risk. If the manager is more heavily penalized for mishedging than rewarded for proper hedging, then uncertainty of perception may induce him not to hedge economic risk. Another reason is that accounting rules may lead to high accounting losses if economic risk is properly hedged by financial contracts.

Details

Managerial Finance, vol. 18 no. 3
Type: Research Article
ISSN: 0307-4358

Abstract

Details

Economic Complexity
Type: Book
ISBN: 978-0-44451-433-2

Book part
Publication date: 14 November 2003

Murray Webster

Basic science, sometimes called “curiosity-driven research” at the National Science Foundation and other places, starts with a question that somehow stays in the mind, nagging for…

Abstract

Basic science, sometimes called “curiosity-driven research” at the National Science Foundation and other places, starts with a question that somehow stays in the mind, nagging for an answer. Such questions really are “puzzles”; they arise in an intellectual field or context, asking someone to fit pieces to an improving but incomplete picture of the social world. What makes a worthwhile puzzle is a missing part in understanding the picture, or a new piece of knowledge that does not seem to fit among other parts. Sometimes creative theorists can imagine a solution to one of the holes in the puzzle. If they are also empirical scientists, they devise ways to get evidence bearing on their ideas, and some of those ideas survive to give more complete and detailed pictures of the world. This chapter is the story of puzzles and provisional solutions to them, developed by dozens of men and women investigating status processes and status structures, using a coherent perspective, for over half a century.1

Details

Power and Status
Type: Book
ISBN: 978-0-76231-030-2

Book part
Publication date: 14 November 2003

Noah E. Friedkin and Eugene C. Johnsen

This paper works at the intersections of affect control theory, expectation states theory, and social influence network theory. First, we introduce social influence network theory…

Abstract

This paper works at the intersections of affect control theory, expectation states theory, and social influence network theory. First, we introduce social influence network theory into affect control theory. We show how an influence network may emerge from the pattern of interpersonal sentiments in a group and how the fundamental sentiments that are at the core of affect control theory (dealing with the evaluation, potency, and activity of self and others) may be modified by interpersonal influences. Second, we bring affect control theory and social influence network theory to bear on expectation states theory. In a task-oriented group, where persons’ performance expectations may be a major basis of their interpersonal influence, we argue that persons’ fundamental sentiments may mediate effects of status characteristics on group members’ performance expectations. Based on the linkage of fundamental sentiments and interpersonal influence, we develop an account of the formation of influence networks in groups that is applicable to both status homogeneous and status heterogeneous groups of any size, whether or not they are completely connected, and that is not restricted in scope to task-oriented groups.

Details

Power and Status
Type: Book
ISBN: 978-0-76231-030-2

Article
Publication date: 31 July 2009

Jacques A. Schnabel

The purpose of this paper is to examine the impact of heterogeneous expectations on the equilibrium value of a risky asset in a capital market populated by investors that choose…

374

Abstract

Purpose

The purpose of this paper is to examine the impact of heterogeneous expectations on the equilibrium value of a risky asset in a capital market populated by investors that choose mean‐variance efficient portfolios.

Design/methodology/approach

A single‐period, discrete‐time version of Williams' capital asset pricing model that incorporates heterogeneous beliefs regarding the mean vector of rates of return and homogeneous beliefs regarding the variance‐covariance matrix of rates of return is developed. It is then employed to gauge the impact of both divergence of opinion and increases thereof on the equilibrium price of a risky asset.

Findings

The value of a risky asset under heterogeneous beliefs differs from that under homogeneous beliefs as the former is biased towards the beliefs of wealthier and/or more risk tolerant investors. If the latter set of investors is optimistic (pessimistic), the value is higher (lower) than that which prevails in the absence of divergence of beliefs. Increasing divergence of opinion likewise affects the equilibrium price of a risky asset to accord more with the beliefs of wealthier and/or more risk tolerant investors. If the latter set of investors is optimistic (pessimistic), increasing dispersion of beliefs causes the value of a risky asset to rise (fall).

Originality/value

A novel simplification and application of Williams' model of capital asset pricing is presented. The findings differ from conclusions derived in previous theoretical treatments of divergence of opinions in capital markets.

Details

Studies in Economics and Finance, vol. 26 no. 3
Type: Research Article
ISSN: 1086-7376

Keywords

Book part
Publication date: 16 August 2007

Katherine W. Phillips and Robert B. Lount

Understanding the impact of diversity on group process and performance has been the focus of much research, yet there are still unanswered questions about how diversity impacts…

Abstract

Understanding the impact of diversity on group process and performance has been the focus of much research, yet there are still unanswered questions about how diversity impacts group process and performance. One factor that is clearly a consequence of group composition is affective tone. In this chapter, we discuss the impact of diversity and homogeneity on affective responses from group members and argue that the relatively negative affective tone experienced in diverse groups may fuel more systematic information processing and improve decision-making performance. The implications for managing both positive and negative affect in groups will be considered.

Details

Affect and Groups
Type: Book
ISBN: 978-0-7623-1413-3

Article
Publication date: 22 November 2022

Juan Gabriel Brida, Bibiana Lanzilotta and Lucia Rosich

From these data, the authors construct an uncertainty index through the use of a vector autoregressive (VAR) model to measure the impact of uncertainty on GDP, controlling for…

Abstract

Purpose

From these data, the authors construct an uncertainty index through the use of a vector autoregressive (VAR) model to measure the impact of uncertainty on GDP, controlling for inflation, which may affect macroeconomic performance. Results indicate that uncertainty is negatively correlated with the economic cycle and the inter-annual variation of the biannual average product.

Design/methodology/approach

This study empirically explores the dynamics of expectations of the Uruguayan manufacturing firms about industrial economic growth. This study explores the dynamics of the industrial economic growth expectations of Uruguayan manufacturing firms. The empirical research is based on firms' expectations data collected through a monthly survey carried out by the Chamber of Industries of Uruguay (CIU) in 2003–2018.

Findings

Granger causality tests show that uncertainty Granger-causes industrial production growth and a one standard deviation shock on uncertainty generates a contraction in the industrial production growth rate. Finally, the authors use statistical and network tools to identify groups of firms with similar performance on expectations. Results show that higher uncertainty is associated with smaller, more interconnected groups of firms, and that the number of homogeneous groups and the distance between groups increases with uncertainty. These findings suggest that policies focused on the coordination of expectations can lead to the development of stable opinion groups.

Originality/value

The paper introduces new data and new methodologies to analyze the dynamics of expectations of manufacturing firms about industrial economic growth.

Highlights

  1. An empirical approach to compare expectations of firms is introduced.

  2. The occurrence of groups of opinion is tested.

  3. Central companies in the network of expectations are detected.

  4. More uncertainty implies a higher degree of discrepancy between the overall firm’s opinions and more compact opinion groups.

An empirical approach to compare expectations of firms is introduced.

The occurrence of groups of opinion is tested.

Central companies in the network of expectations are detected.

More uncertainty implies a higher degree of discrepancy between the overall firm’s opinions and more compact opinion groups.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 25 May 2018

Alexander V. Laskin

The purpose of this paper is to apply a third-person effects theory to the study of corporate social responsibility communications. Previous studies have asked what importance…

1714

Abstract

Purpose

The purpose of this paper is to apply a third-person effects theory to the study of corporate social responsibility communications. Previous studies have asked what importance investors assign to the socially responsible activities of corporations. However, in the context of publicly-traded companies, it becomes important not only to calculate the effects of available information on an individual investor, but also to estimate the effects of every piece of information on the investor’s perception of the investment community at large.

Design/methodology/approach

The study uses a survey methodology in order to evaluate what value respondents assign to socially responsible behaviors as well as to identify a presence of third-person effects in the corporate social responsibility evaluations. Using an online survey, the respondents were asked to read a modified news article and the respond to a series of questions. In total, 96 completed surveys were collected and analyzed.

Findings

The research finds the presence of third-person effects incorporate socially responsibility message processing. The results of the study show that, while individually people are supportive of the socially responsible behaviors of corporations, they perceive others to be less supportive of such behaviors; they also see others as less likely to encourage such behaviors through action. As a result, people are less likely to act on their own views of corporate socially responsibility as they perceive themselves to be outliers. These findings lead to important consequences for investor communications, which are discussed in light of the efficient market hypothesis.

Research limitations/implications

From an academic standpoint, the study proposed that in investor and financial communication, third-person effects could play a significant role. Yet, third-person effects research in investor relations literature simply does not exists. Thus, the study’s main contribution is expanding third-person effects theory into the field of the investor relations research.

Practical implications

From practical standpoint, expectations and perception of corporate social responsibility have a significant effect on corporate reputation and, thus, communication about corporate social responsibility become important as they shape these perceptions and expectations. Yet, such corporate social responsibility issues may include a variety of matters, such as governance, responsibility, and the quality of social and economic choices, sometimes even contradictory to each other. It becomes a job of investor relations managers to study, analyze, and respond to these competing demands.

Social implications

From societal standpoint, the study advances the debate on the role of corporations in the society. With such concepts as social license to operate and creating shared value, and the growing expectations about corporate behavior, understanding the stakeholders perceptions of socially responsible behavior of corporations as a function of their perceptions of other stakeholders’ viewpoints, creates a better understanding of the complexities involved in the issue of corporate social responsibility reporting.

Originality/value

Since investors and other financial publics are not homogenous and may have different perspectives, opinions, values, etc., they may react to the same information differently. Furthermore, they may expect others to behave differently and such perceptions, whether accurate or not, may, in fact, influence their own behavior, as third-person effects theory would suggest. Investor relations, then, becomes a function of managing these expectations. The presence of the third-person effects in investor communications can have a strong effect on market behavior and, thus, must become an important part of the investor relations professionals’ job – how the messages are crafted, communications, and measured. Yet, third-person effects is non-existent in the investor relations literature. Thus, the study provides an original contribution by applying a third-person effects theory in the investor relations research.

Details

Corporate Communications: An International Journal, vol. 23 no. 3
Type: Research Article
ISSN: 1356-3289

Keywords

Article
Publication date: 7 January 2014

Boonlert Jitmaneeroj

In an introductory finance course, business school students often report difficulty in dealing with several variables and regression equations in testing the forward market…

Abstract

Purpose

In an introductory finance course, business school students often report difficulty in dealing with several variables and regression equations in testing the forward market efficiency and its relevant hypotheses: forward rate unbiasedness, rational expectations, risk neutrality and homogeneous expectations. The paper aims to discuss these issues.

Design/methodology/approach

Although each of these hypotheses may be relatively easy to understand one by one, it is harder to see their linkages. Thus, the author develops the loop diagram for supplementing traditional instruction methods.

Findings

The author finds that a significant majority of students prefer the loop diagram approach. Furthermore, students using loop diagram display more understanding of the forward market efficiency than those with access to a conventional instruction.

Originality/value

The loop diagram provides students a simple visual aid for formulating a complete set of regressions and enables them to analyze a richer set of relationships between several hypotheses than what they typically see in finance textbooks.

Details

Managerial Finance, vol. 40 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

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