Research articles for the 2019-12-07

Intra-industry Spill-Over: Evidence from Chinese Bond Default
Hu, Xiaolu,Luo, Leslie,Xu, Vivian,Li, Jiang
We investigate the intra-industry spill-over effect of bond defaults on the price of stocks, outstanding bonds and new bond issuances in China, the largest emerging debt market. We use a sample of A-shares and public corporate debt securities from 2006 to 2018. In the stock market, we find significantly negative reactions from individual industry rivals to industry default while weak reaction from the industry portfolios. In the bond market, both individual firms and industry portfolios witness a strong contagion effect. This contagion effect further spreads to the primary bond market, triggering a surge in the financing cost of the default firm’s competitors after the default. In addition, our study sheds lights on a rich pattern of correlations across default events, which is helpful in improving the understanding of security pricing models and the efficiency of information transfer across markets.

Pure Rank Preferences and Variation in Risk-Taking Behavior
Stark, Oded,Budzinski, Wiktor,Jakubek, Marcin
Assuming that an individual’s rank in the wealth distribution is the only factor determining the individual’s well-being, we analyze the individual’s risk preferences in relation to gaining or losing rank, rather than the individual’s risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual’s utility function.

Uncertainty Under Hyperbolic Discounting: The Cost of Untying Your Hands
Alcocer, Christian,Ortegón, Julián,Roa, Alejandro
Purpose â€" The relevance of present consumption bias on personal finance has been confirmed in several studies and has important theoretical and practical implications. It has important, measurable implications when analyzing commitment or self-control, adherence to healthy habits (e.g. exercising or dieting), procrastination tendencies or savings. The purpose of this paper is to contribute to our understanding of these issues by postulating a model of income uncertainty within a hyperbolic discounting framework that measures the cost of financial intertemporal inconsistencies related to this bias. The emphasis is on the analysis of this cost. We also propose experimental designs and consistent estimation methods, as well as agent-based modelling extensions.Design/methodology/approach â€" The authors develop a finite-horizon model with hyperbolic preferences. Individuals have a present bias distinct from their discount rate so their choices face intertemporal inconsistencies. The authors further extend the analysis with uncertainty about future incomes. Specifically, individuals live for three periods, and the authors find the optimal consumption levels in the perfect-information benchmark by backward induction. They then proceed to add biases and uncertainty to characterize their implications and measure the costs of the intertemporal inconsistencies they cause. Findings â€" The authors measure how an agent’s utility is greater when they “tie their hands” than when they are free to re-evaluate and change their consumption schedule. This “cost of being vulnerable to falling into temptation” only depends (increasingly) on the measure of the present bias and (decreasingly) on the discount factor. They analyze the varying effects on utility and consumption of changes in impatience and optimism. They conclude by discussing theoretical and practical implications; they also propose agent-based simulations, as well as empirical and experimental designs, to further test the relevance and applications of the results.Practical implications â€" This model has important, measurable implications when analyzing commitment or self-control, adherence to healthy habits (e.g. exercising or dieting), procrastination tendencies or savings.Social implications â€" The results enhance the estimation of the costs of present biases such that employers can better identify the incentives required to acquire and retain human capital. The authors provide evidence that workers are vulnerable to contract renegotiations and about the need for a regulator that restores ex-ante efficiency. Similarly, in the private sector, firms could recognize the postulated consumer profiles and focus their resources on anxious, too-optimistic or potentially addictive consumers; this, again, provides some justification about the need for a regulator.Originality/value â€" In traditional exponential discounting, the marginal rate of substitution of consumption between two points depends only on their distance; thus, it allows none of the intertemporal inconsistencies we often observe in real life. Therefore, hyperbolic discounting better fits the data. The authors model choice under uncertainty and focus on the costs caused when present biases (ex-post) push behaviour away from ex-ante optimality. They conclude by proposing experimental designs to further enhance the estimation and implications of these costs. The postulated refinements have the potential to improve previous analyses on commitment devices and commitment-related regulation.