Search results
1 – 10 of over 2000Nahid Zehra and Udai Bhan Singh
The objective of this systematic literature review (SLR) is to explore the current state of research in the field of household finance (HF). This study aims to summarize the…
Abstract
Purpose
The objective of this systematic literature review (SLR) is to explore the current state of research in the field of household finance (HF). This study aims to summarize the existing research to highlight the importance of household finance in a nation’s economy. By exploring all conceptual and applied implications of HF, this study projects directions for future research to develop a comprehensive understanding of the subject.
Design/methodology/approach
This SLR is based on 112 articles published in peer-reviewed journals between 2006 and 2020 (Table 3). The methodology comprises five steps, namely, formulation of research questions, identification of studies, their selection and evaluation, analyses and syntheses and presentation of results.
Findings
The findings of this study show that studies on HF are gradually increasing worldwide with the USA registering the highest number of published research on the topic during the period under scrutiny. Notwithstanding the increasing attention and research on HF, empirical research in emerging economies is lagging. Additionally, this study finds that HF structure presents a perfect setting to understand how households compose their financial portfolio, make financial decisions and what factors influence their decisions.
Research limitations/implications
This study is an SLR – an accurate and accepted method of reviewing available literature on a selected subject. However, the selection of inclusion and exclusion criteria depends on the researchers’ rationale which might lead to research bias. This should be considered an inherent limitation of SLR.
Practical implications
By synthesizing the contents of extant literature, this study presents important insights into HF. This study underlines the most discussed topics in the domain and identifies potential investigation areas. This study gives the knowledge of leading articles, authors and journals and informs scholars and academicians about the areas that need further investigation by portraying the complete picture of the subject in a systematic manner. Further, this study highlights that households make suboptimal financial decisions that affect their financial well-being. To reduce the adverse impacts of these decisions, policymakers and financial institutions must take steps to improve households’ use of formal financial markets. Household decisions can be reformed by enhancing consumers’ knowledge about financial products and services. Furthermore, households can be served better by offering customization in traditional financial products.
Originality/value
This study synthesizes the main findings of selected literature on HF. The expansion of studies on HF has generated the need to review the existing literature in a systematic manner. To the researchers’ best knowledge, this SLR is the first thorough study of available articles in the HF domain. This study presents the scope of future research by highlighting numerous aspects and functions of HF.
Details
Keywords
Ping He and Xiaoqing Hu
Individuals tend to simplify a complex portfolio decision problem into several manageable dimensions, each of which can frame their perception of risk.We check this view by…
Abstract
Individuals tend to simplify a complex portfolio decision problem into several manageable dimensions, each of which can frame their perception of risk.We check this view by studying the effect of investment horizons on households’ portfolio decisions. Using the Survey of Consumer Finances (SCF) data, we find that households allocate more of their wealth in stocks if they report longer planning horizons. The existence of foreseeable expenditure significantly changes the dependence of risky stock investment on the planning horizon.We decompose the reported planning horizon into an objective part and a subjective mental accounting part, and find that the mental accounting part has a greater effect on household portfolio choice. This is consistent with the argument that individuals make investment decisions based on the horizon at which the risk is perceived rather than the horizon at which the investment reward or cash is needed.
Details
Keywords
Doron Nisani, Amit Shelef and Or David
The purpose of this study is to estimate the convergence order of the Aumann–Serrano Riskiness Index.
Abstract
Purpose
The purpose of this study is to estimate the convergence order of the Aumann–Serrano Riskiness Index.
Design/methodology/approach
This study uses the equivalent relation between the Aumann–Serrano Riskiness Index and the moment generating function and aggregately compares between each two statistical moments for statistical significance. Thus, this study enables to find the convergence order of the index to its stable value.
Findings
This study finds that the first-best estimation of the Aumann–Serrano Riskiness Index is reached in no less than its seventh statistical moment. However, this study also finds that its second-best approximation could be achieved with its second statistical moment.
Research limitations/implications
The implications of this research support the standard deviation as a statistically sufficient approximation of Aumann–Serrano Riskiness Index, thus strengthening the CAPM methodology for asset pricing in the financial markets.
Originality/value
This research sheds a new light, both in theory and in practice, on understanding of the risk’s structure, as it may improve accuracy of asset pricing.
Details
Keywords
Nurul Shahnaz Mahdzan, Rozaimah Zainudin, Rosmawani Che Hashim and Noor Adwa Sulaiman
This study aims to investigate the association between Muslim individuals’ portfolio allocation choice and Islamic religiosity (levels and dimensions), controlling for risk…
Abstract
Purpose
This study aims to investigate the association between Muslim individuals’ portfolio allocation choice and Islamic religiosity (levels and dimensions), controlling for risk tolerance and sociodemographic factors.
Design/methodology/approach
The study uses primary data collected via survey questionnaires from a sample of 751 Muslim working individuals in Kuala Lumpur, Malaysia. Owing to the ordinal nature of the dependent variable, which reflects the levels of proportions of risky assets in portfolios, the data were analyzed using an ordered probit regression model.
Findings
The findings reveal that Islamic religiosity levels in general were insignificantly related to portfolio allocation, but that two dimensions of religiosity (virtue and obligation) significantly impact the allocations of risky assets in the portfolio. The higher the level of virtue, the lower the propensity to allocate risky assets into the portfolio. On the contrary, the higher the level of obligation, the higher the propensity to allocate risky assets in the portfolio. Meanwhile, individuals with higher risk tolerance, income and education levels show greater propensity to allocate risky assets in the portfolio.
Research limitations/implications
The sample is restricted to Muslims in Kuala Lumpur; hence, the findings are not easily generalized to Muslim investors in general. Findings may differ between Muslims across the world, so future research needs to expand from a country specific to an international analysis. In addition, future studies could include other determinants of portfolio allocation, such as financial literacy.
Practical implications
The findings of this study may assist financial planners and policymakers to better understand the drivers of portfolio allocation among their Muslim clients.
Originality/value
While other studies have tended to focus on the impact of religiosity on the holdings of specific financial assets, such as Islamic bank accounts or Takaful, the present study explores the effect of Islamic religiosity dimensions on the allocations of risky assets in the portfolio. The study also develops an ordinal measure of portfolio allocation and makes a methodological contribution by using an ordered probit regression analysis.
Details
Keywords
This study aims to examine individuals' tendency to strictly follow their own signal while ignoring predecessors' decisions when making decisions under varying degrees of…
Abstract
Purpose
This study aims to examine individuals' tendency to strictly follow their own signal while ignoring predecessors' decisions when making decisions under varying degrees of uncertainty.
Design/methodology/approach
Using a controlled laboratory experiment, the authors separate the follow-own-signal behavior from other types of behavior such as Bayes consistent or herd-like (i.e. follow-the-majority) behavior.
Findings
As the authors systemically increase the degree of uncertainty in the information environment, participants are increasingly more likely to act only on their own signal. This suggests that financial decisions that are made under highly uncertain market conditions may be more signal revealing, and hence, may lead to better information aggregation than previously thought. The authors also find that as uncertainty increases, participants are more likely to switch in and out of this behavior, suggesting that behavior under highly uncertain conditions may also be more random and complex.
Originality/value
The authors are the first to examine how uncertainty affects the follow-own-signal behavior. The authors also offer potential testable empirical implications, such as an increase in contrarian investing, home bias, and own-company ownership under times of increased uncertainty or in more uncertain markets.
Details
Keywords
Bryan Foltice and Rachel Rogers
This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.
Abstract
Purpose
This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.
Design/methodology/approach
We evaluate 221 undergraduate students in the US and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio.
Findings
Allowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Here, we also find that participants who receive interactive learning modules – which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model – increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.
Originality/value
We find that decision-making related to ambiguous and risky options can be substantially influenced by experiential learning. Our study supplements previous literature, providing a link between research on the effect of ambiguity on stock market participation and implementation of educational programs to improve the asset allocation decision for young adults.
Details
Keywords
I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…
Abstract
I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.
Details
Keywords
Jungmu Kim, Changjun Lee, Woo-Hyuk Lee, Youngkyung Ok and Thuy Thi Thu Truong
The authors aim to understand the driving forces behind the idiosyncratic volatility puzzle in the Korean stock market. The authors study the Korean stock market because previous…
Abstract
Purpose
The authors aim to understand the driving forces behind the idiosyncratic volatility puzzle in the Korean stock market. The authors study the Korean stock market because previous works report a strong idiosyncratic volatility puzzle in Korea, and the market for the exchange-traded funds (ETFs) including low volatility ETFs has experienced drastic growth in Korea.
Design/methodology/approach
Using common stocks listed either on KOSPI or KOSDAQ over the period 1997–2016, the authors estimate idiosyncratic volatility using the Fama–French three-factor model. In addition, based on prior literature, the authors use turnover as a proxy for overvaluation. The authors then study the role of turnover in understanding the idiosyncratic volatility puzzle in Korea.
Findings
The authors find that turnover is highly associated with idiosyncratic volatility. Turnover is extremely large among firms with high idiosyncratic volatility and the puzzle disappears after we control for turnover, meaning that turnover subsumes the explanatory power of idiosyncratic volatility for equity returns. The authors also find underperformance of stocks with high turnover and high idiosyncratic volatility exclusively during earnings announcement periods. Overall, our finding implies that the puzzle arises since high idiosyncratic volatility stocks due to high turnover are overvalued and experience correction afterwards.
Originality/value
Literature has suggested explanations based on lottery preferences of investors and market frictions behind the idiosyncratic volatility puzzle. What makes our study distinct from previous work is that we find the role of turnover in understanding the idiosyncratic volatility puzzle using turnover measure as a proxy for overvaluation in the Korean stock market.
Details
Keywords
En Te Chen and Yunieta Anny Nainggolan
Despite the benefits of international diversification, the home equity bias phenomenon is well documented in the portfolio choice literature. The purpose of this paper is to…
Abstract
Purpose
Despite the benefits of international diversification, the home equity bias phenomenon is well documented in the portfolio choice literature. The purpose of this paper is to investigate whether the same investment behavior applies to domestic socially responsible investments (SRIs) where ethical screenings should be the selection criteria.
Design/methodology/approach
The authors apply the model by Coval and Moskowitz (1999), Grinblatt and Keloharju (2001) and Agarwal and Hauswald (2010) to uncover the effect of distance relative to screenings on SRI domestic portfolio choice. For the first time, the authors test the robustness of distance effect by using time bias, which is the travel time between the fund manager and the company’s headquarter.
Findings
The authors find that SRIs exhibit a strong preference for locally headquartered firms. After controlling for screening activity and other fund characteristics, the authors still find a strong distance bias in SRI fund portfolio decision-making. The authors find that this bias is mostly observed in SRI fund with social screening and that fund holding characteristics determine the propensity of fund managers to invest locally. The results suggest that the local bias puzzle exists in SRI.
Research limitations/implications
This study provides avenue for future research to examine whether the same local bias is found in SRI investment in other countries where they have different characteristics and behavior. Also, the evidence that local bias exists in SRI investment may need further analysis as to whether this is conflicting with the objectives of SRI, which focus more on ethical beliefs.
Practical implications
The results suggest that many local firms in the same city currently held by an SRI fund will not be held by this fund if it is in another city. The implications of the findings are that geographic proximity, along with ethical screenings, is an important dimension to how SRI fund invests.
Originality/value
This study is the first that examines local bias in SRI funds by using portfolio holding data.
Details
Keywords
Mohammadreza Tavakoli Baghdadabad
We propose a risk factor for idiosyncratic entropy and explore the relationship between this factor and expected stock returns.
Abstract
Purpose
We propose a risk factor for idiosyncratic entropy and explore the relationship between this factor and expected stock returns.
Design/methodology/approach
We estimate a cross-sectional model of expected entropy that uses several common risk factors to predict idiosyncratic entropy.
Findings
We find a negative relationship between expected idiosyncratic entropy and returns. Specifically, the Carhart alpha of a low expected entropy portfolio exceeds the alpha of a high expected entropy portfolio by −2.37% per month. We also find a negative and significant price of expected idiosyncratic entropy risk using the Fama-MacBeth cross-sectional regressions. Interestingly, expected entropy helps us explain the idiosyncratic volatility puzzle that stocks with high idiosyncratic volatility earn low expected returns.
Originality/value
We propose a risk factor of idiosyncratic entropy and explore the relationship between this factor and expected stock returns. Interestingly, expected entropy helps us explain the idiosyncratic volatility puzzle that stocks with high idiosyncratic volatility earn low expected returns.
Details