João Paulo Vieito

Brain Activity of the Investor's Stock Market Financial Decision

Using electroencephalogram technologies (EEG) to map the brain, this investigation is among the first to analyze if the same brain circuits are used when making buying, selling, or holding stock decisions and if different circuits are used when market conditions change such as in a growing market or a high volatility market. Two groups of 20 volunteers were used. One group initiated the trading process in a market with steadily increasing prices and then moved to a high volatility market, and the second group started trading in a high volatility market and then in a growing market. Results are quite innovative in the area of finance: brain mapping associated with such decisions differs between these two groups, and also when buying, selling, or holding decisions were made. These results clearly demonstrate that people may use different reasoning strategies to make financial decisions depending on their trading experience.

Market Efficiency in G-20 Countries: The Paradox of Financial Crisis

This paper is amongst the first to investigate weak-form efficiency of the most developed (G-20) countries in the world. It also measures the impact of the 2007 financial crisis on the stock markets of these countries, in terms of their efficiency. Serial correlation test, ADF unit root test, Lo and MacKinlay (1988) variance ratio test, Chow and Denning (1993) RWH test and Wrights 2000 ranks and signs based multiple variance ratio test were utilized to carry out this analysis. The entire study period was divided into a pre-crisis period (January 1, 2005 – August 8, 2007) and a during crisis period (August 9, 2007 – Deccember 31, 2011). Strong contemporaneous effects emerged across all international markets (except Saudi Arabia) as a consequence of the 2007 crisis. This may be due to increased international intra-day activity across the world markets. It was concluded that the Samuelson dictum, which states that while individual stocks are efficient, the market index is inefficient, seems to hold good on a global level by analogy. This is evident on the premise that, on the whole the 2007 crisis reduced return and increased volatility, even though individual markets became more efficient. The most robust result from the analysis is that most of the individual markets are weak-form efficient. Following the crisis of 2007, the methodology used indicates that on the whole, the market efficiency of individual stock markets improved.Hence, during the pre-crisis, volatility was low but heteroskedastic. However, during the period of the crisis, volatility was high but homoscedastic. The heightened volatility and low return that are a consequence of the crisis coupled with improved market efficiency, due to market vigil and control, ensure that abnormal returns and persistent arbitrage possibilities are wiped out. This appears to be a paradox of a crisis.

Antiherding in Financial Decision Increases Valuation of Return on Investment: An Event-Related Potential Study

Using event-related potentials, this study investigated how financial herding or antiherding affected the valuation of subsequent outcomes. For each trial, subjects decided whether to buy the stock according to its net money flow information which could be used to reflect the strength of buying power or selling power of the stock. The return on investment (ROI) as feedback included the increase or decrease percentage after subjects responses. Results showed that, compared with herding, antiherding induced larger discrepancies of FRN and P300 amplitude between positive ROI and negative ROI, indicating that individuals under antiherding condition had stronger motivation and paid more attention in the evaluation process of ROI. Moreover, only for positive ROI, the amplitudes of FRN and P300 were modulated by two kinds of behaviors. We suggested that individuals making antiherd decisions were more confident with their own ability and choices, which reduced the positive outcome prediction error and gave more mental resources to evaluate positive outcome. However, negative outcomes evoked no different motivational meaning and negative emotion for individuals between herding and antiherding. The study may provide new insights into neurocognitive processes of herding and antiherding in financial market.

Neurofinance: How Do We Make Financial Decisions

To cope with the increasing economic complexity of modern life we need a better financial education what implies a better knowledge of how our brain process financial decision making. This is the subject of Neurofinances an emerging multidisciplinary area of research at the frontiers of Neurosciences, Economy, Finances and Accounting. Taking advantage of the new non-invasive Neurosciences techniques to study the human brain, Neurofinances is investigating the brain activity associated with financial decision. Here we discuss how Functional Magnetic Ressonance Imaging (fMRI) and Electroencephalogram (EEG) are being used in these studies. A short survey of fMRI studies is presented. Because we believe that EEG is the tool of choice for studying decision making, we present some results from our group on stock market investment decision. Finally, we conclude that how this kind of knowledge may be of guidance on financial education.

Brain Activity Follow Up of Stock Market Financial Variables

Efficiency Market hypothesis assume that all investors reason in the same way to make their financial decisions. In contrast, Neurosciences have provided strong evidences that cognitive diversity is the hallmark of human intelligence. Neurofinances has shown that volunteers learned different profitable financial decision-making strategies depending on the kind of market they begun to trade. Here, we decide to further explore this hypothesis by studying a possible correlation between brain activity and the financial variables in a stock market game and to test if this correlation differ between experimental groups that trade in different market conditions. Present results show that volunteers had different perceptions of the studied financial variables depending if they initially traded in a bear or a bull market. Our findings are consistent with the hypothesis that different neural circuits were learned to monitor the different financial variables studied here, depending on market conditions.

Gender and Executive Compensation in S&P Listed Firms

We examine if gender gap exists in total executive compensation for SP the forms of executive compensation for men versus women are different; and in the case of new technology firms the differences in total compensation are not statistically significant. Although women have been considered more risk averse than men, but shareholders continue to pay women with a similar percentage of risk compensation components, like stock options and restricted stocks, than men. It seems that the shareholders are ignoring to take this factor into account when developing compensation packages for women and men. Finally we also find that the factors that explain women and men total compensation are not the same for S&P1500 listed firms.

Is the Virtual Integration of Financial Markets Beneficial in Emerging Markets? Evidence from MILA

ABSTRACT This article analyzes whether the Latin American Integrated Market (MILA) has been beneficial for its participants. Using a dynamic conditional correlation (DCC) model proposed by Engle (2002), we found evidence that creating MILA increased the correlation levels in stock returns of member countries. Evidence indicates that this increase occurs mainly due to the increase in traded volume in the country with the least developed stock market—Peru. In short, findings suggest that in an integration process such as MILA, as stock market members differ, in terms of stock market development, the markets will benefit from the integration. However, in the long term these benefits dissipate over time.

Market liberalizations and efficiency in Latin America

Purpose n n n n nThis paper aims to examine the impact of stock market liberalization on efficiency of the stock markets in Latin America. n n n n nDesign/methodology/approach n n n n nDaily stock indices from Latin American countries, including Brazil, Mexico, Chile, Peru, Jamaica and Trinidad and Tobago, are used in the analysis. To examine the impact of stock market liberalization on efficiency, the authors use several approaches, including the runs test, Chow–Denning multiple variation ratio test, Wright variance ratio test, the martingale hypothesis test and the stochastic dominance (SD) test, on the above Latin American stock market indices. n n n n nFindings n n n n nThe authors find that stock market liberalization does not improve stock market efficiency in Latin America. n n n n nOriginality/value n n n n nThis investigation is among the first to examine the impact of stock market liberalization on the efficiency of the stock markets. It is among the first to examine the impact of stock market liberalization on the efficiency of the Latin American stock markets. It is also among the first to apply the martingale hypothesis test and a SD approach on issue about efficient market.

A neuroeconomics analysis of investment process with money flow information: the error-related negativity

This investigation is among the first ones to analyze the neural basis of an investment process with money flow information of financial market, using a simplified task where volunteers had to choose to buy or not to buy stocks based on the display of positive or negative money flow information. After choosing “to buy” or “not to buy,” participants were presented with feedback. At the same time, event-related potentials (ERPs) were used to record investors brain activity and capture the event-related negativity (ERN) and feedback-related negativity (FRN) components. The results of ERN suggested that there might be a higher risk and more conflict when buying stocks with negative net money flow information than positive net money flow information, and the inverse was also true for the “not to buy” stocks option. The FRN component evoked by the bad outcome of a decision was more negative than that by the good outcome, which reflected the difference between the values of the actual and expected outcome. From the research, we could further understand how investors perceived money flow information of financial market and the neural cognitive effect in investment process.

Nonlinear behaviour in EMBI series from Eastern Europe: evidence of 'window size effect'

The main objective of this article is to explore how the number of observations included in a window may impact the rejection rate of linear windows. We employ two methodologies proposed in the literature in order to study the linear and nonlinear behaviour. We use daily Emerging Markets Bond Index (EMBI) index spreads from six of the most important Eastern European countries (Bulgaria, Hungry, Poland, Russia, Serbia and Ukraine). The empirical results show what we call ‘window size effect’ because when we include more than 50 observations in each window, the rejection rate increases using the two different methodologies. Therefore, our findings support the idea that, even in this well informed and sophisticated market, the weak-form of the efficient market hypothesis cannot be confirmed.