Volume 5, Number 2, 2004 Abstracts
© Copyright Erlbaum 2004

The Influence of Affect on Investor Decision-Making
David Dreman-Dreman Value Management

The Influence of Different Investment Horizons on Risk Behavior
Niklas Siebenmorgen-McKinsey & Company
Martin Weber-Universitat Mannheim, Germany, and the CEPR, London

For longer investment periods, investment consultants usually recommend a larger proportion of risky assets for investor portfolios. We examine the effect of different investment horizons on investors' risk behavior. We are interested both in participants' risk perceptions and in their asset allocation behavior. We find significant underestimations of long-term risks, which lead to a higher proportion of risky assets in the long-term portfolios. Our data show that the belief in mean reversion is a potential explanation for this behavior.

Overreaction of Exchange-Traded Funds During the Bubble of 1998-2002
Jeff Madura-Florida Atlantic University
Nivine Richie-Sigmund Weis School of Business at Susquehanna University

This study of overreaction is motivated by the unique characteristics of exchange-traded funds (ETFs), which should contribute to market efficiency. Since ETFs represent portfolios of stocks, they may not be as susceptible to short-term overreaction as individual stocks. In addition, they can be traded throughout the day and can be sold short, which might further limit potential overreaction. Yet, the tradability of ETFs may allow unusual pressure on ETF prices that is not initiated by price movements of all the component stocks. We find substantial overreaction of ETFs during normal trading hours (9:30 a.m. to 4 p.m.) and after hours, which presents opportunities for feedback traders. Extreme price movements of ETFs occur more frequently after hours. Yet, the after-hours correction of extreme price movements that occurred that day is more pronounced than the day correction of extreme stock price movements that occurred in the previous after-hours period, even after controlling for ETF type and other potential confounding effects. The degree of overreaction is also more pronounced for international ETFs.

Does Mutual Fund Flow Reflect Investor Sentiment?
Daniel C. Indro-Penn State University-Great Valley

This paper examines the relationship between net aggregate equity fund flow and investor sentiment using weekly flow data. Using sentiment indicators from the American Association of Individual Investors and Investors Intelligence, I find that net aggregate equity fund flow in the current week is higher when individual investors became more bullish in the previous and current weeks. Moreover, higher net aggregate equity fund flow in the current week induces newsletter writers to become more bullish in the subsequent week. The relationship between net aggregate equity fund flow and investor sentiment remains strong even after accounting for the effects of risk premium and inflation. Overall, the evidence suggests that the behavior of equity fund investors is influenced not only by economic fundamentals, but also by investor sentiment.

Holding on to the Losers: Finnish Evidence
Mirjam Lehenkari-University of Oulu in Finland
Jukka Perttunen-University of Oulu in Finland

Recent literature reports evidence on investor behavior that is inconsistent with traditional finance theory. One currently being debated is behavioral irrationality, the tendency of investors to hold losing investments too long and sell winning investments too soon, a phenomenon known as the disposition effect. We analyze the trading records of all individual investors in the Finnish stock market and document that capital losses reduce the selling propensity of investors. There is, however, no opposite effect identifiable with respect to capital gains. We also find, somewhat surprisingly, that both positive and negative historical returns significantly reinforce the negative association between the selling propensity of investors and capital losses. While these findings offer no direct support for the disposition effect, they do suggest that investors are loss averse.

Research Elsewhere
Robert A. Olsen-California State University, Chico and Decision Research in Eugene, Oregon

Book Reviews
Robert A. Olsen-California State University, Chico and Decision Research in Eugene, Oregon