Yaron Lahav

Price Patterns in Experimental Asset Markets with Long Horizon

We investigate the generality of the bubble and crash price pattern observed in previous asset market experiments. The deviation of prices from fundamental values can be explained by either a failure of subjects to backward induct, a learning effect, or some other explanation. We conduct experiments with a longer horizon of 200 periods to find a possible reason for the timing of the crash. If the reason for the crash is the inability of subjects to backward induct, a long bubble should be observed. If, on the other hand, it is a learning effect, then the crash should occur after approximately 13 periods. Our results show that while prices generally deviate from fundamental values, price patterns are different than in the 15-period markets, featuring multiple bubbles and crashes.

The Effect of Induced Mood on Prices in Asset Markets - Experimental Evidence

In this paper we study the effect of induced positive mood on price patterns in experimental asset markets. We conduct experimental asset markets where subjects go through a mood induction procedure prior to trade. After the subjects are induced with positive affect, they can trade an experimental asset with a known stream of dividends for a known number of periods. Compared to the control (where subjects are not induced with positive affect), we first show that the mood induction procedure was successful. Then, we show when traders induced with positive mood, prices exhibit larger positive deviations from fundamental values. Finally, we show that when subjects are induced with positive mood, they bid on less units of the share, but are willing to pay higher amounts for them. Ask prices and quantities are higher when traders are induced with positive mood.

Changes in the value implications of compensation costs throughout the economic cycle: an examination of high-tech versus low-tech industries

This study explores whether and how the value implications of compensation costs change throughout the economic cycle. Given that we are dealing with the human aspect of the intangibles that drive the value created by a company, it is not obvious what impact the ‘boom’ and ‘bust’ phases of the economic cycle will have on investor valuations of this primary component of a company’s investment in human capital (HC). Our results reveal that economic cycles have a substantial immediate impact on the value implications of compensation costs. Specifically, these value implications increase significantly during upticks in the economy and decline in the downturns, in high-tech as well as low-tech firms. Notwithstanding, the value implications of compensation costs are consistently higher for high-tech firms. Furthermore, the changes in value implications for high-tech firms throughout the economic trends are more volatile than those observed for low-tech firms. When differentiating between investors on and outside the exchange, we find consistently stronger value implications of compensation costs for the latter. It seems that throughout the economic cycle more informed and sophisticated investors have a higher assessment of the role of a firm’s investment in HC in value creation. Another important implication of our results is that, in response to economic changes, investors modify their valuations of HC quickly rather than gradually, which is unexpected given the strategic value and complexity of the human aspect of the firm’s intangibles.

Does Forecast Confidence Boost Trading? Exploring an Improved Forecast Certainty Measure

While finance studies propose that forecast-confidence motivates trading, the experimental findings regarding the anticipated confidence-trading link are inconclusive and typically insignificant. Attempting to bridge the gap, we modify the standard interval forecasting task to measure the personal tendency for forecast-confidence directly. The modified task is utilized to test the confidence-trading correlations at the general, attitudinal level and in specific scenarios. The attitudinal test surprisingly reveals that forecast-confidence links with smaller inclination to churn stocks, although confidence in profitability boosts the willingness to buy particular stocks beyond the response to forecasts alone. The trait level correlation is brought by opposite personality and competence effects on confidence and trading.

Separating Accuracy from Forecast Certainty: A Modified Miscalibration Measure

The standard interval forecasting task is modified, asking subjects to provide point predictions for future returns and assess the likelihood of fixed length intervals around their point estimates. The difference between the subjective likelihood estimates and the realized hit rate is advanced as an improved miscalibration measure. Class and take-home studies reveal that 140 of 169 finance students and experts overestimate their hit rates, confirming the overprecision hypothesis. A comparative study additionally shows that the revised task weakly decreases the miscalibration rates from 50% to 38% (p=0.16).

The inverse of a terror event? Stock market response to pro-active action

Purpose - – This paper aims to study and document the effect of counter-terrorism on stock returns. The authors select a sample of pro-active defense operations, performed by the Israeli military and government agencies, with significant media coverage, including leading international channels. Design/methodology/approach - – The authors use the event study methodology to assess the effect of each operation on the Israeli equity market. The theoretical background of this work is the recent behavioral literature on anomalies in the formation of asset pricing and in investors’ decision-making. Findings - – The authors find generally a statistically significant positive equity market reaction, on average, to prominent successful operations. The initial market response is usually negative and then changes according to the type of event, its specific circumstances and expected ramifications. Originality/value - – Unlike the vast prior literature on terror effects, the authors believe that this is the first paper to study the market reaction to prominent counter-terrorism operations.

Risk Transfer Valuation in Advance Pricing Agreements between Multinational Enterprises and Tax Authorities

Advance pricing agreements (APAs) are long-term contracts between multinational taxpayers and tax authority(ies), according to which the taxpayer consents to use the agreed upon transfer price for its related transactions for a fixed period of time. We argue that for such an agreement to be based on the principle of arm’s length, the specified transfer price(s) should include a premium that captures the risk transferred from one entity to another. When this risk is not accounted for, the long-term transfer pricing policy specified in the agreement (although supported by tax authorities) is not arm’s length. We present a pricing model that can be easily applied to value such risk by incorporating it to the transfer price determined by the APA.