The Journal of Finance

An Exploration of Neo‐Austrian Theory Applied to Financial Markets

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00353

Harald Benink, Peter Bossaerts

We attempt to translate Neo‐Austrian ideas about the workings of financial markets, as originally advanced by F. A. Hayek, into the standard probabilistic language of modern finance. We focus on an apparent paradox, namely the insistence of Neo‐Austrians on order (i.e., stationarity) together with ever‐reemerging inefficiencies. The paper's findings have implications beyond Neo‐Austrian theory: They demonstrate how easy it is to reject market efficiency, but how much more difficult it is to discern the nature of the inefficiency. We illustrate our findings with price data from the U.S. Treasury bill market over the period 1962 to 1999. There is ample evidence that the price of a three‐month Treasury bill is not a random walk, yet the sign of the average price change is erratic, so that inference about the nature of the inefficiency is unreliable.

Tax‐Induced Intertemporal Restrictions on Security Returns

Published: 09/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb02457.x

PETER BOSSAERTS, ROBERT M. DAMMON

This article derives testable restrictions on equilibrium asset prices when investors have the option to time the realization of their capital gains and losses for tax purposes. The tax‐timing option alters both the magnitude and timing of equity returns relative to those in a tax‐free model. The tax‐induced restrictions are empirically examined, and the tax rates and preference parameters are estimated. While the tax‐free model can be rejected in favor of the tax‐based model as the specified alternative, the tax‐based model is still unable to adequately explain cross‐sectional differences in asset returns.

“Lucas” in the Laboratory

Published: 02/03/2016   |   DOI: 10.1111/jofi.12392

ELENA ASPAROUHOVA, PETER BOSSAERTS, NILANJAN ROY, WILLIAM ZAME

We study the Lucas asset pricing model in a controlled setting. Participants trade two long‐lived securities in a continuous open‐book system. The experimental design emulates the stationary, infinite‐horizon setting of the model and incentivizes participants to smooth consumption across periods. Consistent with the model, prices align with consumption betas and comove with aggregate dividends, particularly so when risk premia are higher. Trading significantly increases consumption smoothing compared to autarky. Nevertheless, as in field markets, prices are excessively volatile. The noise corrupts traditional generalized method of moment tests. Choices display substantial heterogeneity, with no subject representative for pricing.

Exploring the Nature of “Trader Intuition”

Published: 09/21/2010   |   DOI: 10.1111/j.1540-6261.2010.01591.x

ANTOINE J. BRUGUIER, STEVEN R. QUARTZ, PETER BOSSAERTS

Experimental evidence has consistently confirmed the ability of uninformed traders, even novices, to infer information from the trading process. After contrasting brain activation in subjects watching markets with and without insiders, we hypothesize that Theory of Mind (ToM) helps explain this pattern, where ToM refers to the human capacity to discern malicious or benevolent intent. We find that skill in predicting price changes in markets with insiders correlates with scores on two ToM tests. We document GARCH‐like persistence in transaction price changes that may help investors read markets when there are insiders.

Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility

Published: 11/18/2013   |   DOI: 10.1111/jofi.12126

CARY FRYDMAN, NICHOLAS BARBERIS, COLIN CAMERER, PETER BOSSAERTS, ANTONIO RANGEL

We conduct a study in which subjects trade stocks in an experimental market while we measure their brain activity using functional magnetic resonance imaging. All of the subjects trade in a suboptimal way. We use the neural data to test a “realization utility” explanation for their behavior. We find that activity in two areas of the brain that are important for economic decision‐making exhibit activity consistent with the predictions of realization utility. These results provide support for the realization utility model. More generally, they demonstrate that neural data can be helpful in testing models of investor behavior.