This dissertation consists of two empirical essays about the cognitive limitation, herding behavior, and their association with investment performance. The essays utilize the detailed quotes and trades data in the Taiwan Futures Exchange with investor account identity, to study the cognitive limitation and herding behavior of the investors, and the association between the cognitive limitation, herding behavior, and the investment performance. In the first essay, I hypothesize that cognitive limitation maybe manifested in a disproportionately large volume of limit orders submitted at round-number prices if investors use these numbers as cognitive shortcuts., I find that investors with lower cognitive abilities, defined as higher limit order submission ratios at round numbers, suffer greater losses in their round-numbered and non-round-numbered limit orders, market orders, and round-trip trades. The positive correlation between cognitive ability and investment performance is monotonic and robust across futures and options markets. In addition, past trading experience helps mitigate the cognitive limitation. The second essay studies the herding behavior of investors. The second essay studies the herding behavior of investors. I find that individual investors trade in the same direction with other individual investors in the same branch of a broker. Individual investors’ tendency to herd is persistent, and it is negatively associated with their cognitive abilities and trading experience. The higher the herding tendency of an individual investor is, the worse she performs in her investments. Importantly, the negative association between herding and investment performance is driven by the orders that are traded in the same direction with other individual investors. Our results suggest that herding with other individuals imposes a direct cost to individual investors. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

Duan, Xin. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2007. / Includes bibliographical references (leaves 36-43). / Abstracts in English and Chinese. / Abstract --- p.i-ii / Acknowledgement --- p.iii / Table of Contents --- p.iv / Chapter Chapter 1 --- Introduction --- p.1 / Chapter Chapter 2 --- Related Literature --- p.6 / Chapter 2.1 --- Exchange Market Pressure Index --- p.6 / Chapter 2.2 --- The Sentiment Index --- p.11 / Chapter Chapter 3 --- Stock market sentiment --- p.16 / Chapter 3.1 --- Data --- p.16 / Chapter 3.2 --- Methodology --- p.23 / Chapter 3.3 --- Estimated Results --- p.25 / Chapter Chapter 4 --- Application to the Hong Kong stock market --- p.28 / Chapter 4.1 --- Threshold Model Estimation --- p.28 / Chapter 4.2 --- Trading Strategy --- p.30 / Chapter Chapter 5 --- Conclusion --- p.32 / Appendix: Principle Component --- p.34 / References --- p.36

Kam, Kwok Hung. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2008. / Includes bibliographical references (leaves 100-103). / Abstracts in English and Chinese. / Abstract Page --- p.11 / Abstract (Chinese) --- p.12 / Acknowledgment Page --- p.13 / Table of Contents --- p.1 / Table of Figures --- p.1 / Chapter 1 --- Introduction --- p.1 / Chapter 1.1 --- Background --- p.1 / Chapter 1.2 --- Utility and Value Function --- p.5 / Chapter 1.2.1 --- Expected utility theory --- p.5 / Chapter 1.2.2 --- Prospect Theory --- p.9 / Chapter 1.3 --- Mental Accounting --- p.14 / Chapter 1.3.1 --- Segregation vs Aggregation --- p.17 / Chapter 2 --- Moving reference point with loss aversion --- p.21 / Chapter 2.1 --- Model Setup --- p.21 / Chapter 2.2 --- Simulation Results --- p.27 / Chapter 3 --- Constant Rebalancing Portfolio with Additive Utility --- p.30 / Chapter 3.1 --- Model setting --- p.31 / Chapter 3.1.1 --- Additive Utility Theory (AUT) --- p.33 / Chapter 3.2 --- Analysis --- p.34 / Chapter 3.3 --- Results --- p.35 / Chapter 3.4 --- Summary --- p.38 / Chapter 4 --- Revision of Gomes´ة Work --- p.40 / Chapter 4.1 --- Background --- p.40 / Chapter 4.2 --- Portfolio Allocation with zero surplus wealth --- p.44 / Chapter 4.3 --- Portfolio Allocation with Negative Surplus --- p.46 / Chapter 4.4 --- Portfolio Allocation with Positive Surplus --- p.50 / Chapter 4.5 --- Numerical Results --- p.51 / Chapter 4.5.1 --- Gomes´ة Work --- p.56 / Chapter 4.6 --- Summary --- p.57 / Chapter 5 --- Mental Accounting under Value Function in the Prospect Theory --- p.59 / Chapter 5.1 --- Cognitive dissonance --- p.59 / Chapter 5.2 --- Market Setting --- p.60 / Chapter 5.3 --- Single Mental Account --- p.61 / Chapter 5.4 --- Two Mental Accounts --- p.63 / Chapter 5.5 --- Numerical results --- p.67 / Chapter 5.5.1 --- Pessimistic View --- p.71 / Chapter 5.6 --- Summary --- p.72 / Chapter 6 --- Mental Accounting under Friedman-Savage Value Function --- p.74 / Chapter 6.1 --- Two Assets with Single mental account --- p.76 / Chapter 6.1.1 --- Different Sharpe ratios --- p.78 / Chapter 6.1.2 --- Same Sharpe ratio --- p.82 / Chapter 6.2 --- Two Assets with two mental accounts --- p.85 / Chapter 6.2.1 --- Segregation or Aggregation --- p.86 / Chapter 6.2.2 --- Numerical results --- p.90 / Chapter 6.3 --- Summary --- p.93 / Chapter 7 --- Conclusion --- p.96 / Bibliography --- p.100

abstract / Business / Doctoral / Doctor of Philosophy

No abstract available / Industrial and Organisational Psychology / D. Com. (Consulting Psychology)

Two essays on the stock preference and performance of institutional investors are included in the dissertation. In the first essay, I document that mutual fund managers and other institutional investors tend to hold stocks with higher betas. This effect holds even after precisely controlling for stocks’ risk characteristics such as size, book-to-market equity ratio and momentum. This is contrary to the widely accepted view that betas are no longer associated with expected returns. However, these results support my simple model where a fund manager’s payoff function depends on returns in excess of a benchmark. For the manager, on the one hand, he tends to load up with high beta stocks since he wants to co-move with the market and other factors as much as possible. On the other hand, the manager faces a trade-off between expected performance and the volatility of tracking error. My model thus shows that the manager prefers to choose higher beta than his benchmark, and that his beta choice has an optimal level which depends on his perceived factor returns and volatility. My empirical findings further confirm the model results. First, I show that the effect of managers holding higher beta stocks is robust to a number of alternative explanations including the effects of their liquidity selection or trading activities. Second, consistent with the model predictions of managers sticking close to their benchmarks during risky periods, I demonstrate that the average beta choice of mutual fund managers can predict future market volatility, even after controlling for other common volatility predictors, such as lagged volatility and implied volatility. The second essay is the first to explicitly address the performance of actively managed mutual funds conditioned on investor sentiment. Almost all fund size quintiles subsequently outperform the market when sentiment is low while all of them underperform the market when sentiment is high. This also holds true after adjusting the fund returns by various performance benchmarks. I further show that the impact of investor sentiment on fund performance is mostly due to small investor sentiment. These findings can partially validate the existence of actively managed mutual funds which underperform the market overall (Gruber 1996). In addition, when conditioning on investor sentiment, the pattern of decreasing returns to scale in mutual funds, recently documented in Chen, Hong, Huang, and Kubik (2004), is fully reversed when sentiment is high while the pattern persists and is more pronounced when sentiment is low. Further results suggest that smaller funds tend to hold smaller stocks, which is shown to drive the above patterns. I also document that smaller funds have more sentiment timing ability or feasibility than larger funds. These findings have many important implications including persistence of fund performance which may not exist under conventional performance measures. / text

Disposition effect is one of the most documented trading anomalies studied in financial market. Its presence has been established over time horizons, time periods and market participants. This study will examine such trading behavior in the housing market. Using Mei Foo Sun Chuen estate, one of the largest and most frequent transacted estate in Hong Kong, we show that disposition effect is present in this market. A major difficulty in the statistical analysis is the presence of censored data problem, which is hard to circumvent in linear regression models. So we adopt a survival analysis approach, which can accommodate the issue and fit the data structure. The other difficulty is the possibility of omitted variables in the analysis. Instead of appealing to instrumental variables model approach, which is widely applied in many research studies on individual behavior but is extremely hard to be justified in a whole market case, we make use of partial identification approach to estimate bounds for the estimates rather than just a point estimate. Even though this seems offer us less precise information, it is still informative, especially when the bounds are narrow, and it is much less vulnerable to the validity of instruments. Besides the above techniques, we use bootstrapping method to estimate the standard errors throughout the analysis in order to make valid inference. There are three main results we have established in this study. First, the disposition effect is present in Hong Kong housing market. It shows up in both in pre-1997 and post-1997 periods, which suggest that it is a general phenomenon rather than a short-term trading pattern arising from a major macroeconomic event. Secondly, we show that it is the nominal perspective loss that matters, but not real loss. This confirms the validity of basic setup of both Prospect theory and most previous empirical studies on the disposition effect. Thirdly, the disposition effect is more significant for short term owner of less than 3 years. In fact, the disposition effect is absent or even reverses for those flat owners of more than 6 years. Comparing to the very first study on disposition effect by Shefrin & Statman (1985), our study makes a step forward in understanding trading behavior. We extend it applicability to housing market while their focus is only on financial market even though we are not the first to attempt the extension. We not only show the presence of disposition effect in the housing market, we also show that disposition effect is time dependent. Our results lead further support to disposition effect that its key component, loss, matters only in nominal term, not in real term. Instead of only applying ordinary least squared regression methods, which is widely used in the literature, we apply partial identification approach to tackle the endogeneity issue and apply duration models to deal with censored data and unobserved heterogeneity issues. All this makes our statistical results more robust. / published_or_final_version / Real Estate and Construction / Doctoral / Doctor of Philosophy

Behavioural theories of finance and economics have received little academic attention until recently. Nevertheless, behavioural theories of investor behaviour can be directly applied to categorization of investors and prediction of future behaviour. The purpose of characterizing and predicting future behaviour is to ensure allocation of appropriate corporate resources to meet the needs of clients as effectively as possible. This research specifically focuses on segmentation and predictive modeling of retail clients at Phillips, Hager & North Investment Management Ltd. Segmentation is undertaken through cluster analysis of investors based on transactional and performance data. Subsequent logistic regression and seemingly unrelated regression models are developed to determine if investment personality - through Know-Your-Client (KYC) information - and demographics have an explanatory and predictive relationship with future investor behaviour.

No abstract available / Industrial and Organisational Psychology / D. Com. (Consulting Psychology)

South Africa has a poor savings culture. This means that South Africans do not save enough income for a later stage resulting in a relative large number of South African consumers living in debt and using more credit than what they have saved. Almost half of the South African consumers were in debt during the year 2010 and had a negative credit record. Thus consumers in South Africa are not living only in poor conditions but are also open to exploitation by the informal economy. Lenders in the informal economy are known as ‘loan sharks’ because they charge consumers interest rates of between 40 and 60 percent. This is because low income consumers have less access to savings products and credit facilities from the formal economy. These factors are more prevalent among the black consumers, as they use informal credit providers. The sources of credit for black consumers in the informal market are social networks such as friends and family. Furthermore, black consumers have low levels of knowledge regarding issues such as bad debts. Black consumers are also more likely to experience financial problems than other racial groups. This means that black consumers may need to improve their levels of financial knowledge, financial skills and adopt positive financial attitudes to manage their financial problems without obtaining more debt. Thus, financial education may be the way of ensuring that black consumers improve their financial decision-making ability and their financial behaviour. Therefore, the purpose of this study is to investigate the relationships between financial literacy, financial inclusion and financial behaviour among the black community in Nelson Mandela Bay. To achieve the purpose of this study, a literature review was conducted on financial literacy, financial education, financial inclusion and financial behaviour. This was followed by an empirical investigation to establish the relationships between financial literacy, financial inclusion and financial behaviour. In this study, a quantitative research approach was adopted as necessitated by the purpose of this study and also to be able to collect a vast amount of perceptions from the black community. The sample of this study consisted of low to middle income black consumers living in Nelson Mandela Bay.