Role Of Behavioural Factors In Asset Pricing: Psychoanalysis Perspective And Evidence From Malaysia
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Date
2018-09
Authors
Jasman Tuyon
Journal Title
Journal ISSN
Volume Title
Publisher
Universiti Sains Malaysia
Abstract
Behavioural finance paradigm argue that behavioural risks are the main driver of stock mispricing that induced stock market inefficiency particularly in emerging Asia and cause unpredicted financial crisis. However, being a new school of thought, the behavioral asset pricing theory and empirical evidence are still incomplete which represents a nascent research area with a multitude of open questions and research opportunities. Based on philosophical lenses of behavioural finance, this thesis discusses alternative theoretical, model, and new evidence on behavioural asset pricing determinants. First and foremost, the alternative theory and model are established. In theory, the psychoanalysis approach is used as an alternative theoretical basis to understand the rational and irrational human behaviours. In modeling, a quasi-rational multifactor asset pricing determinants is proposed that combined rational and irrational sources of equity risks determinants. Firm (EPS, DY, PE) and economic (CI, LEI, LAI) fundamentals are identified as a source of rational risk. While the irrational forces represented by cognitive heuristics (seasonality), and affective biases due to sentiment (BCS, CSI, FKLI) as well as emotion (VOL). In empirical test, this thesis investigates the equity risk and returns properties using behavioural asset pricing ideology in a factor and style investing framework to acknowledge the heterogeneity of risk-return relationships. The empirical tests are performed based on a sample of 238 Malaysian firm stock returns using the panel regression and quantile panel regression methods with monthly data frequency. The analyses provide evidence supporting the dynamic of risk-returns relationships due to quasi-rational risk determinants and given different sub-samples in consideration. In brief, the results show that all fundamental and behavioural risks are significant in influencing firm stock returns in Malaysia. In addition, the risk-return relationships are found to be heterogeneous given different firm groups, industry groups, market states, and gains-losses prospects. The findings are in line with behavioural finance perspectives that investors’ behaviour are bounded rational in the sense that their investment are influenced by both rational (fundamental) and irrational (behavioural) risks. Ideally, in investment practice, bounded rational investor’s causes the adaptive behaviour of stock prices and consequently induced changing patterns of market efficiency. Apart from the theoretical and empirical confirming evidence, the research offers new insights on multi-styles equity portfolio diversification strategies to minimize the influence of behavioural risks. In particular, stocks belong to cycle industry, small-medium size, high value, and lower price are highly vulnerable to behavioural risks. Meanwhile stocks belong to defensive industry, big size, low-medium value, and high price are less influenced by behavioural risks. As an investment industry application, this research suggested the behavioural style quadrant as a diversification strategy. In specific, the risk-return characteristics are organized in the multi-style (firm, industry, market, and calendar) equity portfolio layers to form a mix of equity portfolio that is resilient on the influence of behavioural risks. Collectively, this thesis not only provide testimonial for the validity of behavioural asset pricing but offering new insights that are practically relevant to investment practice and financial markets policy makers to understand asset prices and financial markets behaviour based on the behavioural finance perspective.
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Keywords
Investments , Capital assets pricing model