Research on the influence of behavioral forces that motivate trader behavior and sentiment: A prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. ^ The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. ^ Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. ^ The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior. ^

Essays on the impact of stakeholders' sentiment on the financial decision making process

The most important factor that affects the decision making process in finance is the risk which is usually measured by variance (total risk) or systematic risk (beta). Since investors’ sentiment (whether she is an optimist or pessimist) plays a very important role in the choice of beta measure, any decision made for the same asset within the same time horizon will be different for different individuals. In other words, there will neither be homogeneity of beliefs nor the rational expectation prevalent in the market due to behavioral traits. This dissertation consists of three essays. In the first essay, “ Investor Sentiment and Intrinsic Stock Prices”, a new technical trading strategy was developed using a firm specific individual sentiment measure. This behavioral based trading strategy forecasts a range within which a stock price moves in a particular period and can be used for stock trading. Results indicate that sample firms trade within a range and give signals as to when to buy or sell. In the second essay, “Managerial Sentiment and the Value of the Firm”, examined the effect of managerial sentiment on the project selection process using net present value criterion and also effect of managerial sentiment on the value of firm. Final analysis reported that high sentiment and low sentiment managers obtain different values for the same firm before and after the acceptance of a project. Changes in the cost of capital, weighted cost of average capital were found due to managerial sentiment. In the last essay, “Investor Sentiment and Optimal Portfolio Selection”, analyzed how the investor sentiment affects the nature and composition of the optimal portfolio as well as the portfolio performance. Results suggested that the choice of the investor sentiment completely changes the portfolio composition, i.e., the high sentiment investor will have a completely different choice of assets in the portfolio in comparison with the low sentiment investor. The results indicated the practical application of behavioral model based technical indicator for stock trading. Additional insights developed include the valuation of firms with a behavioral component and the importance of distinguishing portfolio performance based on sentiment factors.

Essays on the Impact of Stakeholders' Sentiment on the Financial Decision Making Process

The most important factor that affects the decision making process in finance is the risk which is usually measured by variance (total risk) or systematic risk (beta). Since investors' sentiment (whether she is an optimist or pessimist) plays a very important role in the choice of beta measure, any decision made for the same asset within the same time horizon will be different for different individuals. In other words, there will neither be homogeneity of beliefs nor the rational expectation prevalent in the market due to behavioral traits. This dissertation consists of three essays. In the first essay, Investor Sentiment and Intrinsic Stock Prices, a new technical trading strategy is developed using a firm specific individual sentiment measure. This behavioral based trading strategy forecasts a range within which a stock price moves in a particular period and can be used for stock trading. Results show that sample firms trade within a range and show signals as to when to buy or sell. The second essay, Managerial Sentiment and the Value of the Firm, examines the effect of managerial sentiment on the project selection process using net present value criterion and also effect of managerial sentiment on the value of firm. Findings show that high sentiment and low sentiment managers obtain different values for the same firm before and after the acceptance of a project. The last essay, Investor Sentiment and Optimal Portfolio Selection, analyzes how the investor sentiment affects the nature and composition of the optimal portfolio as well as the performance measures. Results suggest that the choice of the investor sentiment completely changes the portfolio composition, i.e., the high sentiment investor will have a completely different choice of assets in the portfolio in comparison with the low sentiment investor. The results indicate the practical application of behavioral model based technical indicators for stock trading. Additional insights developed include the valuation of firms with a behavioral component and the importance of distinguishing portfolio performance based on sentiment factors.

Research on the influence of behavioral forces that motivate trader behavior and sentiment- a prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior.

Text analytics of social media: Sentiment analysis, event detection and summarization

In the last decade, large numbers of social media services have emerged and been widely used in people's daily life as important information sharing and acquisition tools. With a substantial amount of user-contributed text data on social media, it becomes a necessity to develop methods and tools for text analysis for this emerging data, in order to better utilize it to deliver meaningful information to users. ^ Previous work on text analytics in last several decades is mainly focused on traditional types of text like emails, news and academic literatures, and several critical issues to text data on social media have not been well explored: 1) how to detect sentiment from text on social media; 2) how to make use of social media's real-time nature; 3) how to address information overload for flexible information needs. ^ In this dissertation, we focus on these three problems. First, to detect sentiment of text on social media, we propose a non-negative matrix tri-factorization (tri-NMF) based dual active supervision method to minimize human labeling efforts for the new type of data. Second, to make use of social media's real-time nature, we propose approaches to detect events from text streams on social media. Third, to address information overload for flexible information needs, we propose two summarization framework, dominating set based summarization framework and learning-to-rank based summarization framework. The dominating set based summarization framework can be applied for different types of summarization problems, while the learning-to-rank based summarization framework helps utilize the existing training data to guild the new summarization tasks. In addition, we integrate these techneques in an application study of event summarization for sports games as an example of how to better utilize social media data. ^

Text Analytics of Social Media: Sentiment Analysis, Event Detection and Summarization

In the last decade, large numbers of social media services have emerged and been widely used in people's daily life as important information sharing and acquisition tools. With a substantial amount of user-contributed text data on social media, it becomes a necessity to develop methods and tools for text analysis for this emerging data, in order to better utilize it to deliver meaningful information to users. Previous work on text analytics in last several decades is mainly focused on traditional types of text like emails, news and academic literatures, and several critical issues to text data on social media have not been well explored: 1) how to detect sentiment from text on social media; 2) how to make use of social media's real-time nature; 3) how to address information overload for flexible information needs. In this dissertation, we focus on these three problems. First, to detect sentiment of text on social media, we propose a non-negative matrix tri-factorization (tri-NMF) based dual active supervision method to minimize human labeling efforts for the new type of data. Second, to make use of social media's real-time nature, we propose approaches to detect events from text streams on social media. Third, to address information overload for flexible information needs, we propose two summarization framework, dominating set based summarization framework and learning-to-rank based summarization framework. The dominating set based summarization framework can be applied for different types of summarization problems, while the learning-to-rank based summarization framework helps utilize the existing training data to guild the new summarization tasks. In addition, we integrate these techneques in an application study of event summarization for sports games as an example of how to better utilize social media data.