Discussion Papers

C7 - Organisation des Wertpapierhandels

SFB/TR 15 Discussion Paper No.


Gerlinde Fellner, Matthias Sutter (C7)
Causes, consequences, and cures of myopic loss aversion - An experimental investigation


Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.

Keywords: loss aversion, risk, investment, experiment
JEL Classification: C91, D80, G11
June 2005


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SFB/TR 15 Discussion Paper No.


Georg Nöldeke, Thomas Tröger (A6, C7)
A Characterization of the Distributions That Imply Existence of Linear Equilibria in the Kyle-Model


The existence of a linear equilibrium in Kyle's model of market making with multiple, symmetrically informed strategic traders is implied for any number of strategic traders if the joint distribution of the underlying exogenous random variables is elliptical. The reverse implication has been shown for the case in which the random variables are independent and have finite second moments. Here we extend this result to the case in which the underlying random variables are not necessarily independent and their joint distribution is determined by its moments.

Keywords: Market Microstructure, Kyle Model, Linear
JEL Classification: G14, D82
May 2005


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SFB/TR 15 Discussion Paper No.


Thierry Foucault, Sophie Moinas, Erik Theissen (C7)
Does Anonymity Matter in Electronic Limit Order Markets?


Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We develop a model of limit order trading in which some traders have better information on future price volatility. As limit orders have option-like features, this information is valuable for limit order traders. We solve for informed and uninformed limit order traders’ bidding strategies in equilibrium when limit order traders’ IDs are concealed and when they are visible. In either design, a large (resp. small) spread signals that informed limit order traders expect volatility to be high (resp. low). However the quality of this signal and market liquidity are different in each market design. We test these predictions using a natural experiment. As of April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. For our sample stocks, we find that following this change, the average quoted and effective spreads declined significantly. Consistent with our model, we also find that the size of the spread is a predictor of future price volatility and that the strength of the association between the spread and volatility is weaker after the switch to anonymity.

Keywords: Market Microstructure, Limit Order Trading, Anonymity, Transparency, Liquidity, Volatility Forecasts
JEL Classification: G10, G14, G24
May 2004


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