Organizations & Markets

Bayesian learning implies decreasing weights on prior beliefs and increasing weights on the accuracy of the analyst?s past forecast record, as the number of forecast errors comprising her forecast record (its length) increases. Consistent with this model of investor learning, empirical tests show that investors? reactions to forecast news are increasing in the product of the accuracy and length of analysts? forecast records. Moreover, the Bayesian learning predicted by our model is more descriptive of investor reactions than is a static model which predicts that investors?

Using both a linear regression method and a probability-based method, we find that on average analysts place larger than efficient weights on (i.e., they over-weight) their private information when they forecast corporate earnings. We also find that analysts over-weight more when issuing forecasts more favorable than the consensus, and over-weight less, and may even under-weight, private information when issuing forecasts less favorable than the consensus.

Combining survey responses and trading records of clients of a German retail broker, this paper examines some of the causes for the apparent failure to buy and hold a well-diversified portfolio. The subjective investor attributes gleaned from the survey help explain the variation in actual portfolio and trading choices. Self-reported risk aversion is the single most important determinant of both portfolio diversification and turnover; other things equal, investors who report being more risk tolerant hold less diversified portfolios and trade more aggressively.

A liquidity trader wishes to trade a ?xed number of shares within a certain time horizon and to minimize the mean and variance of the costs of trading. Explicit formulas for the optimal trading strategies show that risk-averse liquidity traders reduce their order sizes over time and execute a higher fraction of their total trading volume in early periods when price volatility or liquidity increases. In the presence of transaction fees, numerical simulations suggest that traders want to trade more frequently when price volatility goes up or liquidity declines.

In this chapter, I'll lay out the principal facts and controversies surrounding international flows of capital and their attendant risks. I'll review the perspectives of economic historians and economists on the implications of capital mobility, both during the first wave of globalization (prior to World War I) and during the recent wave (since 1980). I'll emphasize changes over time - especially political changes - that have weakened the case for unfettered capital mobility and have made capital flows more controversial among economists today than in the past.

Globalization has been sold as bringing unprecedented prosperity to the billions of people who have remained mired in poverty for centuries. Yet, globalization faces enormous resistance especially in the Third World. Why so? I argue that globalization today has been oversold.

This study examines the factors that influence the type and amount of trust managers have in members of their professional networks. Results indicate that affect-based trust is high in alters who are densely embedded in ego's network, provide social support, and demographically similar to ego. Cognition-based trust is higher in those with whom ego engages in instrumental exchange, and is unaffected by embeddedness or demographics.

The distinction between affect- and cognition-based trust is applied to investigate differences between Chinese and American managerial networks. We found that affect- and cognition-based trust were more intertwined for Chinese managers than American managers. For Chinese managers, affect-based trust was more associated with economic dependence ties and less with friendship ties. Whereas alter's embeddedness in ego's network solely increased affect-based trust for American managers, it increased both types of trust for Chinese managers.

Contagion is usually defined as correlation between markets in excess of what would be implied by economic fundamentals; however, there is considerable disagreement regarding the definitions of the fundamentals, how the fundamentals might differ across countries, and the mechanisms that link the fundamentals to asset returns. Our research takes, as a starting point, a two-factor model with time-varying betas that accommodates various degrees of market integration between different markets.