The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Perception of Dependence, Investment Decisions, and Stock Prices
Published: 11/24/2020 | DOI: 10.1111/jofi.12993
MICHAEL UNGEHEUER, MARTIN WEBER
How do investors perceive dependence between stock returns; and how does their perception of dependence affect investments and stock prices? We show experimentally that investors understand differences in dependence, but not in terms of correlation. Participants invest as if applying a simple counting heuristic for the frequency of comovement. They diversify more when the frequency of comovement is lower even if correlation is higher due to dependence in the tails. Building on our experimental findings, we empirically analyze U.S. stock returns. We identify a robust return premium for stocks with high frequencies of comovement with the market return.
Thinking about Prices versus Thinking about Returns in Financial Markets
Published: 08/08/2019 | DOI: 10.1111/jofi.12835
MARKUS GLASER, ZWETELINA ILIEWA, MARTIN WEBER
Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors think of prices and returns in the same way? We present three studies in which subjects differ in the level of expertise, amount of information, and type of incentive scheme. The results are consistent across all studies: asking subjects to forecast returns as opposed to prices results in higher expectations, whereas showing them return charts rather than price charts results in lower expectations. Experience is not a useful remedy but cognitive reflection mitigates the impact of format changes.