|
Post by Sapphire Capital on Aug 26, 2008 20:36:43 GMT 4
Do Behavioral Biases Adversely Affect the Macro-Economy? George M. Korniotis Board of Governors of the Federal Reserve System Alok Kumar University of Texas at Austin August 16, 2008 Abstract: This study investigates whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. We focus on the risk sharing (or income smoothing) role of financial markets and demonstrate that risk sharing levels are higher in U.S. states in which investors have higher cognitive abilities and exhibit weaker behavioral biases. Further, in states with greater stock market wealth and better risk sharing opportunities, the achieved levels of risk sharing are higher (lower) if the investors in those states possess greater (lower) financial sophistication. Among the various determinants of risk sharing, behavioral factors have the strongest effects. The average level of risk sharing in states with less sophisticated investors (= 0.131) is less than half of the average risk sharing level in states with greater investor sophistication (= 0.324). Collectively, our evidence indicates that the high risk sharing potential of financial markets is not fully realized because the aggregate behavioral biases of individual investors impede state-level risk sharing. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1230522_code56396.pdf?abstractid=1216163&mirid=2
|
|