טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentBoris Levit
SubjectEvaluation Periods in Financial Markets
DepartmentDepartment of Industrial Engineering and Management
Supervisor Full Professor Kliger Doron


Abstract

The theoretical concept of Myopic Loss Aversion (MLA) has been subject to vast experimental research. To date, however, it has not been tested in real market conditions. In the first part of this present research we test for the existence of MLA in the stock market. Exploration of MLA in the market level is important for several reasons. First, in the market investors are confronted with repeated situations, and may learn from their own experience as well as from each other. Second, people may apply different decision rules when confronted with real market situations, rather than with laboratory setups.

We use historical data from the Tel-Aviv Stock Exchange that occasionally temporary shifts some stocks from daily to weekly trading. The shift results in longer commitment periods to particular investments, as well as less frequent and more aggregate feedback on stock returns. The empirical analysis employs tests of expected returns and stock sensitivity, based on historical weekly returns under both trading regimes, excluding the transition periods between them. We find that during weekly trading, expected returns over the market (industry) were significantly lower, than during daily trading. The volatility (total, systematic, and idiosyncratic) during the weekly trading period was lower than during the daily trading period. The results provide strong support for the existence of MLA in financial markets.

In the second part of this work, we replicate the situation observed in the market research in a laboratory experiment. Previous experimental studies of MLA were based on a between-subject comparison of the investment decisions under different evaluation periods. We use a within-subject setup that allows observing the effects of the shift in evaluation periods directly. In every round of the experiment the participants decide which part of their current balance they want to invest in the risky asset. After the shift to longer evaluation period the chances to observe recent loss in the feedback are lower. Thus in the long run subjects should treat the stock as a less risky and increase their investment proportion, due to MLA. The average investment rate has risen substantially after the shift, though the participants were aware that the returns distribution remained unchanged. These results reinforce our empirical findings, as they demonstrate the way in which framing of evaluation affects stock prices, holding information constant.