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Alok Kumar - One of the best experts on this subject based on the ideXlab platform.
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political activism Information Costs and stock market participation
Journal of Financial Economics, 2013Co-Authors: Yosef Bonaparte, Alok KumarAbstract:This paper examines whether political activism increases people's propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their Information gathering Costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level data sets, state-level data from the US, and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9–25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces Information gathering Costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.
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Political Activism, Information Costs, and Stock Market Participation
Journal of Financial Economics, 2013Co-Authors: Yosef Bonaparte, Alok KumarAbstract:This paper examines whether political activism increases people's propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their Information gathering Costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level data sets, state-level data from the US, and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9–25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces Information gathering Costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.
Yosef Bonaparte - One of the best experts on this subject based on the ideXlab platform.
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political activism Information Costs and stock market participation
Journal of Financial Economics, 2013Co-Authors: Yosef Bonaparte, Alok KumarAbstract:This paper examines whether political activism increases people's propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their Information gathering Costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level data sets, state-level data from the US, and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9–25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces Information gathering Costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.
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Political Activism, Information Costs, and Stock Market Participation
Journal of Financial Economics, 2013Co-Authors: Yosef Bonaparte, Alok KumarAbstract:This paper examines whether political activism increases people's propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their Information gathering Costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level data sets, state-level data from the US, and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9–25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces Information gathering Costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.
Mondher Bellalah - One of the best experts on this subject based on the ideXlab platform.
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On Information Costs, short sales and the pricing of extendible options, steps and Parisian options
Annals of Operations Research, 2018Co-Authors: Mondher BellalahAbstract:This paper provides a simple framework for the valuation of exotic derivatives within shadow Costs of incomplete Information and short sales. The specific features of the OTC markets with comparison to the organized markets require an additional investment to obtain Information about the financial products, to process data, to elaborate models, etc. The shadow cost includes two components. The first component is the product of pure Information cost due to imperfect knowledge. The second component represents the additional cost caused by the short-selling constraint. Information Costs are linked to Merton’s (J Fianance 42:483–510, 1987 ) model of capital market equilibrium with incomplete Information, CAPMI. This model is extended by Wu et al. (Rev Quant Finance Account 7:119–136, 1996 ) who propose incomplete-Information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow Costs of incomplete Information and short sales. Our methodology incorporates shadow Costs of incomplete Information and short sales in the options and their underlying securities. We provide formulas using the standard Black and Scholes method or the martingale method. Since shadow Costs are important in the presence of illiquidity, the formulas are useful for the valuation of OTC derivatives.
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Evaluation of Real Options with Information Costs
SSRN Electronic Journal, 2011Co-Authors: Jean-michel Sahut, Mondher Bellalah, Inass El FarissiAbstract:This paper presents a simple framework for the analysis, valuation and simulation of several real options in the presence of shadow Costs of incomplete Information. Information Costs can be viewed as sunk Costs in the spirit of Merton’s (1987) model of capital market equilibrium with incomplete Information. We incorporate these sunk Costs in standard discounted cash flow techniques and present the basic concepts of real options. The justification of Information Costs in real projects is based on the observation that R&D needs to be done before investment decisions. These Costs account for all the expenses needed to be informed about an investment opportunity and the management of projects. This analysis extends the models in Bellalah (1999, 2001) for the valuation of real options within Information uncertainty. We present valuation procedures and simulations for the values of common real options in the presence of shadow Costs of incomplete Information.
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Real Options with Information Costs: A Synthesis
International journal of business, 2007Co-Authors: Mondher Bellalah, Georges ParienteAbstract:ABSTRACT This paper presents some new results regarding the pricing of real options in the presence of market frictions. Since the standard literature ignores the role of market frictions and the effect of incomplete Information, we rely on Merton's (1987) model of capital market equilibrium with incomplete Information (CAPMI) to introduce Information Costs in the pricing of real assets. Using this model instead of the standard CAPM of Sharpe (1964) allows computing the value of the firm and its assets in the presence of Information uncertainty. In the original derivation of the Black-Scholes (1973) model, the CAPM was used. In the same context, the CAPMI model can be used. Using the methodology in Bellalah (1999, 2001, 2002) and in Paxson (2003) for the pricing of real options, we extend the standard models to account for the effects of shadow Costs of incomplete Information. The models can be used for the valuation of several real options, RD Real options; Information Costs; Joint venture I. INTRODUCTION The standard literature on capital budgeting techniques uses the net present value as a reference criterion in investment decisions. The analysis is mainly based on the use of the cost of capital in the discounting of future cash flows. A project is accepted if its extended Net Present Value, NPV, is positive, otherwise it is rejected. The extended NPV corresponds to the standard NPV plus the flexibility in investment decisions. The standard technique for calculating the NPV has not changed much since Fisher (1907) by discounting the expected cash flow at an appropriate discount rate. The research in this area is based on the specification and estimation of the discount rate. Over the last two decades, a body of academic research takes the methodology used in financial option pricing and applies it to real options in what is well known as real options theory. This approach recognizes the importance of flexibility in business activities. Today, options are worth more than ever because of the new realities of the actual economy: Information intensity, instantaneous communications, high volatility, etc (2). The literature on real options and discounted cash flow techniques ignores the role of Information uncertainty. However, these Costs play a central role in financial markets and capital budgeting decisions. Financial models based on complete Information might be inadequate to capture the complexity of rationality in action. Some factors and constraints, like entry into a business are not costless and may influence the short run behaviour of asset prices. The treatment of Information and its associated Costs play a central role in capital markets. If an investor does not know about a trading opportunity, he will not act to implement an appropriate strategy to benefit from it. However, the investor must determine if potential gains are sufficient to warrant the Costs of implementing the strategy. These Costs include time and expenses required to create data base to support the strategy, to build models and to get informed about the technology. This argument applies in varying degrees to the adoption in practice of new structural models of evaluation. This reasoning holds not only for individual investors but also for professional managers who spend resources and time in the same spirit. It is also valid for the elaboration and implementation of option pricing models. Hence, recognition of Information Costs might be important in asset valuation and has the potential to explain empirical biases exhibited by prices computed from complete Information models. As shown in Merton (1987), the "true" discounting rate for future risky cash flows must be coherent with his simple model of capital market equilibrium with incomplete Information. …
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On derivatives and Information Costs
International Review of Economics & Finance, 2006Co-Authors: Mondher BellalahAbstract:Abstract Information plays a central role in capital markets and in the process of asset pricing. The specific features of over-the-counter (OTC) markets require often an investment in Information acquisition. Information Costs can be defined in the context of Merton's [ Merton, R. (1987). A simple model of capital market equilibrium with incomplete Information. Journal of Finance, 42, 483–510 ] model of capital market equilibrium with incomplete Information (CAPMI). In this context, hedging portfolios can be constructed and analytic formulas can be derived using the Black and Scholes technology or the martingale method. This paper presents a simple framework for the valuation of exotic derivatives and OTC traded securities in this context. We incorporate Information Costs into a model, and then use this new model to price a variety of exotic options using the general context in Bellalah [ Bellalah, M. (2001). Market imperfections, Information Costs and the valuation of derivatives: Some general results. International Journal of Finance, 13, 1895–1928 ]. In each case, simple analytic formulae are derived. From a pedagogical viewpoint, we illustrate the methodology and propose simple analytic formulas for pay-on-exercise options, power derivatives, outperformance options, guaranteed exchange-rate contracts in foreign stock investments, equity-linked foreign exchange options and quantos in the same context. These formulae are simple and have the potential to explain some deviations with respect to the standard Black–Scholes model. We can use also stochastic volatilities and Information Costs to explain the smiles and skews found in options price data as in Bellalah, Prigent, and Villa [ Bellalah, M., Prigent, J. L., & Villa, C. (2001). Skew without skewness: Asymmetric smiles, Information Costs and stochastic volatilitiy, International Journal of Finance, 2001, 1826, 1837 ] or Bellalah and Mahfoudh (2004) [Bellalah M. and Mahfoudh S. (2004). Option pricing under stochastic volatility with incomplete Information, Wilmott Magazine]. Our methodology can be applied for the valuation of several OTC and real options in the presence of incomplete Information.
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On Arbitrage, Information Costs, Compound Options and the Valuation of the Firm and Its Assets
International journal of business, 2003Co-Authors: Mondher BellalahAbstract:ABSTRACT This paper presents a simple framework for the valuation of compound options within a context of incomplete Information. Information Costs are linked to the theory of signaling, agency models and generic stocks in the spirit of Merton's (1987) model of capital market equilibrium with incomplete Information. We propose some ideas to explain arbitrage in financial markets in the presence of Information Costs. The use of these Costs is important in the valuation of equity of some firms in the "new economy" like Internet stocks. Equity in these firms cannot be valued in an appropriate way by a model ignoring Information uncertainty. When deriving the compound call option formula, we consider a call option on a stock, which is itself an option on the assets of the firm. Our methodology incorporates shadow Costs of incomplete Information on the firm's assets as well as the effects of leverage in the capital structure. The compound option formula is derived using two approaches: the standard Black and Scholes approach and the martingale method. The formula can be useful in the valuation of several corporate liabilities in the presence of Information uncertainty about the firm and its cash flows. Our analysis can be used for the valuation of several real options. JEL: G3, G31, G32, G33 Keywords: Options; Arbitrage; Pricing; Information Costs I. INTRODUCTION The compound option or an option on an option has been studied in a context of complete Information by several authors including Black and Scholes (1973), Geske (1979), Triantis and Hodder (1990), Briys-Bellalah et al. (1998), etc. The concept of an option on an option is important in the study of several opportunities with a sequential nature where some of them are available only if earlier opportunities are undertaken. For a survey of this literature on real standard and complex options, the reader can refer to Dixit and Pindyck (1994), Triantis and Hodder (1990) and Grenadier and Weiss (1997) among others. Black and Scholes (1973), Black and Cox (1976), Galai and Masulis (1976) and Geske (1979) show that several corporate liabilities may be considered as options. In a context of complete Information, they study the pricing of a firm's common stock and bonds by considering the stock as an option on the firm's value. They show that corporate investment opportunities may be analyzed as options and compound options. However, their analysis does not account for Information uncertainty. Since the acquisition of Information and its dissimination are central activities in finance, and especially in capital markets, Merton (1987) develops a model of capital market equilibrium with incomplete Information, CAPMI, to provide some insights into the behavior of security prices. He also studies the equilibrium structure of asset prices and its connection with empirical anomalies in financial markets. In this spirit, Bellalah (1990) and (1999) provides a valuation formula for stock options and commodity options in a context of incomplete Information. The formula is derived in an equilibrium approach by a simple extension of the main results in Merton's model. In this paper, we use arbitrage arguments rather than an equilibrium approach to derive the formula in a Black and Scholes (1973) economy. Such a formula might be applied to the valuation of equity in the capital structure of the firm. The use of Information Costs regarding the firm and its cash flows might help to understand why Black and Scholes model leads to theoretical prices, which are systematically biased. The Information uncertainty about the firm and its cash flows reflects the agency Costs and the asymmetric Information problems. By assuming the stock as an option on the value of the firm, the value of the call as a compound option can be derived as a function of the firm's value by accounting for Information Costs and the effects of leverage. …
Taisu Zhang - One of the best experts on this subject based on the ideXlab platform.
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Beyond Information Costs: Preference Formation and the Architecture of Property Law
Journal of Legal Analysis, 2020Co-Authors: Taisu ZhangAbstract:AbstractContemporary property theory highlights Information Costs as the central determinant of exclusion rights and numerus clausus-type standardization: rising Information Costs lead to stronger exclusion rights and more standardization, whereas falling Information Costs have the opposite effect. This paradigmatic model lacks, however, a theory of how Information Costs change in the first place. By developing such a theory, this article demonstrates that, in prominent cases, the legal impact of Information Costs tends to be counterbalanced by concurrent changes in individual preference, and that preexisting predictions about the relationship between Information Costs, standardization, and exclusion are therefore partially wrong, and otherwise incomplete.
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Beyond Information Costs: Preference Formation and the Architecture of Property Law
SSRN Electronic Journal, 2018Co-Authors: Taisu ZhangAbstract:Contemporary property theory highlights Information Costs as the most important determinant of exclusion rights and numerus clausus-type standardization: rising Information Costs lead to stronger exclusion rights and more standardization—that is, a reduction in the number of allowed property forms—whereas falling Information Costs have the opposite effect. What this paradigmatic model lacks, however, is a theory of how and why Information Costs change in the first place. By developing such a theory, this article demonstrates that, in important cases, the legal impact of Information Costs tends to be counterbalanced by concurrent changes in individual preference, and that preexisting predictions about the relationship between Information Costs, standardization, and exclusion are therefore partially wrong, and otherwise incomplete. Scholars have long understood that Information Costs, especially those related to property, are negatively correlated with social and political cohesion: tighter communities and stronger states correlate with lower Information Costs, whereas sociopolitical disintegration correlates with higher Information Costs. But this is only half the picture: sociopolitical cohesion is also negatively correlated with the diversity of individual preferences, in that higher levels of sociopolitical cohesion homogenize preferences, whereas sociopolitical disintegration diversifies them. Information Costs and preference diversity are therefore synchronized in many sociopolitical contexts: when Information Costs rise (or fall), so does preference diversity. Recognizing this synchronization challenges some of the central predictions of current property theory, but reinforces others. Most importantly, it implies that there is often no obvious correlation between Information Costs and legal standardization. Although rising Information Costs incentive more standardization, simultaneous increases in preference diversity drive up the frustration Costs of standardization, and therefore incentive less standardization. Either side can emerge victorious from this legal tug-of-war. The article identifies several major historical episodes in which a sharp rise in Information Costs was, contrary to current theoretical predictions, followed by the creation of many new property forms. In contrast, the positive correlation between Information Costs and exclusion rights is perhaps even stronger than what current models predict: rising Information Costs boost the attractiveness of exclusion-based private property regimes, but so does the corresponding increase in preference diversity.
Ronald J Gilson - One of the best experts on this subject based on the ideXlab platform.
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market efficiency after the financial crisis it s still a matter of Information Costs
Virginia Law Review, 2014Co-Authors: Ronald J Gilson, Reinier KraakmanAbstract:Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007-2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble – as a result of politics, it expanded from a narrow but important academic theory about the Informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its Information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses Informational efficiency, which is a relative, not an absolute measure. This focus on Informational efficiency leads to a more focused understanding of what went wrong in 2007-2008. Yet Informational efficiency is related to fundamental efficiency – if all Information relevant to determining a security’s fundamental value is publicly available and the mechanisms by which that Information comes to be reflected in the securities market price operate without friction, fundamental and Informational efficiency coincide. But where all value relevant Information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the Information efficiency of prices and their relation to fundamental value. Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the Information Costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized.