Related Background：
- Emerging markets
1>Higher profitability and volatility, higher downside risk, higher dispersion of returns among stocks than developed markets. The characteristic speculative nature of the stock markets in emerging markets, high presence of noise traders, prevailing speculations. 2> Abundant evidences of market segmentation in emerging markets, suggesting emerging markets are still less integrated with global equity markets than other developed markets. 3> As I investigated in my master thesis, I take mainland China’s stock market as an example of emerging market. The relationship between existing risk factors and returns appears to be weak. It has been established that the standard asset pricing models that have been widely applied to developed markets perform poorly when attempting to explain the abnormal returns observed in emerging markets (see Fama and French, 1998; Rouwenhorst, 1999).
- Risk-based factors in explaining asset pricing anomalies
- Behavioral finance in asset pricing and investment decision-making
Behavioral models can make interesting predictions about stock returns and explain some puzzles which cannot be explained by risk-based factors.
A variety of studies assert behavioral-based interpretations play a vital role in explaining the difficulties faced by the traditional risk-based paradigm, including limits to arbitrage, psychological biases (investor’s beliefs, preferences)
In some behavioral finance models, agents fail to update their beliefs correctly. In
other models, agents apply Bayes’ law properly but make choices that are normatively questionable, in that they are incompatible with SEU.
- Behavioral cooperate finance
Irrational investors and managers could affect the financing and investment decisions of listed firms in several significant ways:
1>, capital structure
2>, dividends
3>, managerial irrationality
Investment policy:
1>, real investment
2>, M&A
Financing policy:
1>, Equity issuances (IPOs, SEOs)
2>, Share repurchases
3>, Debt issuances
Firm managers: Hedge funds are not the only market participants trying to take advantage of noise traders: firm managers also play this game. If a manager believes that investors are overvaluing his firm’s shares, he can benefit the firm’s existing shareholders by issuing extra shares at attractive prices. The extra supply this generates could potentially push prices back to fundamental value.
Therefore, it would be meaningful to investigate the beliefs and preferences of shareholders and managers.
Research Questions：
Base on traditional asset pricing models，incorporate behavioral-based interpretation，qualify and quantify behavioral factors, incorporating AI computer Learning algorithms, develop statistical methods in estimating impacts of above-mentioned factors on equity returns and seek for new efficient expected return proxies, develop investment strategy.
- Empirical asset pricing of financial assets (mainly in emerging markets): investigation of potential asset pricing anomalies and other expected return proxies, investment strategy development.
- Investigate asset pricing anomalies with behavioral-based model using less than fully rational agents. (Effects of investor behavior on stock returns)
- Investor irrationality
- Applying behavioral cooperate finance in asset pricing (managerial decision considering investor irrationality and managerial irrationality): Relation between firm’s capital structure, financing (equity/ debt issuance) and investment decisions with stock prices, investigate stocks’ misvaluation and investment opportunity.
- Institutional frictions (In current literatures, most behavioral-based models captured evidence about investors’ biases or the limits to arbitrage. I would like to investigate the interplay between limits to arbitrage with cognitive biases in my future research).
- Determinants of investment-decision making among individual and institutional investors
- Statistical methods in estimating the impact of above-mention factors on stock prices and investment strategy development.
