DEPARTMENT OF ECONOMICS

ECON412: BEHAVIOURAL FINANCE 2020-21

COURSE AIMS & OBJECTIVES, KEY SKILLS AND LEARNING OUTCOMES

This course develops the asset pricing implications of the coincidence of market imperfections and imperfections in investor rationality. Thus it explores the boundary between mispricing that is exploitable and that which is not profitably exploitable. This course lays foundations for arbitrage, investment and wealth management, investment banking, and corporate finance. Topics covered are at the frontier of academic and industry research, forming a body of conceptually advanced syllabus (CFA level III) with theoretical, empirical and practical consequentiality.

By the end of this course, students should have a knowledge and understanding of:

(i) The application of core advanced financial economics and quantitative methods to applied topics within the sphere of behavioural finance;

(ii) Show understanding of advanced analytical methods, both theory- and model-based;

(iii) Demonstrate a deeper and comprehensive understanding of a named specialism within Behavioural Finance.

By the end of the course, students should be able to:

(a) Apply complex ideas to solve problems;

(b) Work with abstract concepts and in a context of generality;

(c) Reason logically and work analytically.

COURSE STRUCTURE

The course runs for 10 weeks and comprises two hours of asynchronous content and one hour of synchronous contact (either online or in-person) per week.

COURSE CONVENOR

Dr. Kim Kaivanto

LECTURER AND TUTOR CONTACT INFORMATION (Including Office Hours)

Lecturer                     Room             Office hour          e-mail

Dr. Kim Kaivanto          B41                Wed 9-10             [email protected]

Dr Jiawen Li                 B51                tba                      [email protected]

ADMINISTRATIVE SUPPORT STAFF

Emma Fitchett           email: [email protected]

Caren Wareing           email: [email protected]

The Administrative Staff are your primary point of contact for all administrative matters concerning Economics courses. You should contact Administrative Staff primarly by email.

Office Hours: Mon-Fri, 9:30-11:30 and 14:00-16:00, for contacting Administrative Staff in MS Teams. 

Please note: The course website on MOODLE is the primary means of communication with students.

Also any emails will be sent to your Lancaster email account which you should check regularly.

MOODLE INFORMATION

Course website via MOODLE: https://mle.lancs.ac.uk/course. Login using your regular Lancaster University access details. This opens a page headed MLE: My home.

ATTENDANCE AND LECTURE INFORMATION

Attendance is monitored with the iLancaster Attendance Check-in. Absences are recorded electronically against an individual's record. It is the responsibility of each student to ensure that their attendances are correctly recorded. Students must report all absences (illness or otherwise) using the online self certification system http://mylusi.lancs.ac.uk/StudentInfo/ then click on absence notification). In cases where illness is causing you to miss a coursework element or for an illness causing you to miss a continued number of classes, you are required to provide medical confirmation after consultation with a doctor/GP whilst ensuring that you still maintain your attendance record in the self certification system. Equally, we may feel it necessary to request that you provide additional documentation to support the reasons you have entered on the self certification system for your absence(s). Students who are absent without explanation will be recorded as an unauthorised absence and this will be reported to the appropriate Director of Studies, who decides whether disciplinary measures need to be taken. Persistent failure to attend without explanation will lead to referral to the Standing Academic Committee and the risk of permanent exclusion from the University. Please note that the University teaching day runs until 20:00 hours. If you have any event timetabled up to and including this you should not make any travel arrangements that involve you leaving Lancaster before this time, in particular on the last day of term.

TIMETABLE INFORMATION

For timetable information for this module please refer to http://timetabling.lancaster.ac.uk/AcademicTimetable/Default.aspx , using your Lancaster University username and password to login, then follow the link ‘Timetables 2020/21': Students’. We advise that you check the online timetable regularly as timings and venues for lectures, tutorials, seminars, workshops, clinics, tests etc. can be changed at short notice from time to time. Please note that the University teaching day runs until 20:00 hours. If you have any event timetabled up to and including this you should not make any travel arrangements that involve you leaving Lancaster before this time, in particular on the last day of term.

COURSEWORK ASSESSMENT AND DEADLINES

This coursework assessment for this course comprises one compulsory essay of no more than 1,500 words.

Coursework must be submitted electronically through the Moodle site for this course: https://mle.lancs.ac.uk/course. Login using your regular Lancaster University access details. This opens a page headed MLE: My home. Note that your work will be screened using software designed to detect plagiarism. Your essay will be marked electronically: there is no need to submit a 'hard copy'. The deadline is 12 noon Tuesday 16th March, Week 20. The Moodle system assigns a time stamp to your submission to indicate when the system has successfully received your submission, which may be several seconds after you click the 'submit' button. The time stamp is definitive. Submissions that are late by up to 72 hours receive a penalty of 10 marks. Submissions that are late by more than 72 hours receive a mark of zero.

*Word counts are inclusive of all material submitted apart from the References.

COURSEWORK AND TEST RETURN INFORMATION

The coursework will be marked and returned to students within 4 weeks of the test date/submission deadline.

MARKING CRITERIA AND PENALTIES

PLEASE NOTE: Work submitted up to three days late with no agreed extension will receive a penalty of 10%. Work submitted more than three days late will receive a mark of 0 (zero). The definition of ‘days late’ includes weekend days; deadlines will normally be set such that the third day does not occur at a weekend. If the third day should fall on a weekend, students will have until 10.00 a.m. on Monday to hand in without receiving further penalty. Extensions will be given only in the most exceptional of circumstances.

For further explanation on Marking Criteria please refer to the Economics Postgraduate ‘Programme Handbook’ .

FINAL MARKING INFORMATION

This course is assessed by means of formal examination and coursework. The final mark for the course is calculated 1/3 CWA + 2/3 Exam.

STUDENT FEEDBACK

At the end of the course students will be given the opportunity to provide feedback on the course. This is done through an online questionnaire using the Questionmark Perception software. Students will be notified via email during the course as to when the questionnaires will be available. This feedback is extremely valuable to the University as it enables us to identify areas of strength and weakness so that we can improve the course in the future. You are strongly advised to complete this questionnaire for every course that you take at Lancaster University.

COURSE TEXT AND RECOMMENDED READING

This course does not follow a set textbook. Nevertheless, the following is an excellent source. 

Shleifer, A (2000) Inefficient Markets: An Introduction to Behavioral Finance, OUP: Oxford.

COURSE OUTLINE/LECTURE SCHEDULE

WEEK 11: The EMH and Competing Theories

Hirshleifer, D (2001) Investor Psychology and Asset Pricing, Journal of Finance, 56(4), pp. 1533–1597.

Fama, E (1991) Efficient Capital Markets II, Journal of Finance 46(5), pp. 1575—1617.

WEEK 12: Limits to Arbitrage

Carve-out anomalies, Dual-listed company anomalies, Index inclusion anomalies, Sophisticated investors ‘riding the wave’ of predictable investor sentiment Shleifer, A. (2000) Ch. 2, 4.

WEEK 13: Private Investors’ Psychology

Heuristics, Biases & Prospect Theory; Mental Accounts; Evidence in Market Prices

Barberris N, Thaler R (2003) ‘A survey of behavioral finance’, ch 18 in Constantinides GM, Harris M, Stulz R (eds) Handbook of the Economics of Finance, Elsevier, especially pp. 1063–1073.

WEEK 14: Investor Behaviour I: Myopic Loss Aversion, Disposition Effect; Overtrading

Barberris N, Thaler R (2003) ‘A survey of behavioral finance’, ch 18 in Constantinides GM, Harris M, Stulz R (eds) Handbook of the Economics of Finance, Elsevier, especially pp. 1099–1103.

De Bondt, W (1998) A Portrait of the Individual Investor, European Economic Review 42(3-5), pp. 831–844.

WEEK 15: Investor Behaviour II: Professional Investors & Analysts

Dittrich, DAV, Guth, W, Maciejovsky, B (2005) Overconfidence in investment decisions: An experimental approach, European Journal of Finance 11(6), pp. 471-491.

De Bondt, W, Thaler, R (1990) Do Security Analysts Overreact?, American Economic Review, 80(2), pp. 52-57.

WEEK 16: Bubbles

Observational and Experimental; Rational and Non-rational

*Xiong, W, Yu, J (2009) The Chinese warrants bubble, American Economic Review 101(x), pp. 1–34.

*Haruvy, E, Noussair, C (2006) The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets, Journal of Finance, 61(3), pp. 1119-1157.

Brunnermeier M, Nagel S, (2004) ‘Hedge Funds and the Technology Bubble’, Journal of Finance 59(5), pp. 2013–2040.

Temin, P, Voth, H-J, (2004) ‘Riding the South Sea Bubble’, American Economic Review 94(5), pp. 1654–1668.

WEEK 17: Closed-End-Fund Discounts, Co-movement and Sentiment

*Lee, C, Shleifer, A, Thaler, R (1991) Investor Sentiment and the Closed-end Fund Puzzle, Journal of Finance 46, pp. 75–110.

*De Long, J, Shleifer, A, Summers, L, Waldmann, R (1990) Noise Trader Risk in Financial Markets, Journal of Political Economy 98(4), pp. 703–738.

Barberis, N, Shleifer, A, Wurgler, J (2005) Comovement, Journal of Financial Economics 75(x), pp. 283–317.

WEEK 18: Equity Premium Puzzle and the Volatility Puzzle

*Barberis, N, Huang, M, Santos, T (2001) Prospect Theory and Asset Prices, Quarterly Journal of Economics 116(1), pp. 1–53.

*Benartzi, S, Thaler, R (1995) Myopic Loss Aversion and the Equity Premium Puzzle, Quarterly Journal of Economics 110(1), pp. 75–92.

Barberis, N, Huang, M (2008) The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle," in Handbook of Investments: The Handbook of the Equity Premium, ed. by R. Mehra, pp. 199–228. North Holland, Amsterdam.

WEEK 19: Herding, Under- and Over-reaction

Daniel, K, Hirshleifer, D, Subrahmanyam, A (1998) Investor Psychology and Security Market Under-and Overreactions, Journal of Finance 53(6) pp. 1839–1885.

Barberis, N, Shleifer, A, Vishny, R (1998) A Model of Investor Sentiment, Journal of Financial Economics, 49(), pp. 307–343

WEEK 20: Behavioural Portfolio Theory; Behavioural Asset Pricing Theory

*Das, S, Markowitz, H, Scheid, J, Statman, M (2010) Portfolio Optimization with Mental Accounts. JFQA 45(2), pp. 311–334.

Shefrin, H, Statman, M (2000) Behavioral Portfolio Theory. JFQA 35(2), pp. 127–151.

Das, SR, Statman, M (2013) Options and Structured Products in Behavioral Portfolios. JED&C 37(1), pp. 137–153.

*DeMiguel, V, Garlappi, L, Uppal, R (2009) Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy? Review of Financial Studies 22(5), pp. 1915–1953.

Shefrin, H (2008) Risk and Return in Behavioral SDF-based Asset Pricing Models, Journal of Investment Management 6(3), pp. 1–18.