Coleman Applied Investment Theory

How Markets and Investors Behave, and Why
1. Auflage 2016
ISBN: 978-3-319-43976-1
Verlag: Springer Nature Switzerland
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 260 Seiten

Reihe: Progress in Mathematics

Institutions now dominate trading in equities around the world. Mutual funds are the most prominent, and doubly important as custodians of retirement savings. Despite this, there is no comprehensive description of fund manager behaviour, much less a matching theory. This is troubling because one of the most economically significant puzzles in finance is why experienced, well-resourced fund managers cannot outperform the market.Applied Investment Theory: How Equity Markets Behave, and Why brings together academic research, empirical evidence and real market experience to provide new insights into equity markets and their behaviours. The book draws upon the author's rich industry experience and academic research, plus over 40 interviews with fund managers on three continents and across different markets. The result is an innovative model that explains the puzzle of poor performance by mutual funds in terms of structural features of markets, the managed investment industry, and the conduct of fund managers.This book provides a fully integrated depiction of what markets and investors do, and why - insights that will resonate with the needs of investors, wealth managers and industry regulators. It is fully documented, but free of jargon and arcane math, and provides a grounded theory that is relevant to anyone who wants to pierce the opacity of mutual fund operations. Applied Investment Theory sets out a new paradigm in investment that is at the forefront of what should be an industrial-scale development of new finance theory following two decades of almost back-to-back financial crises.

Les Coleman is a Senior Lecturer in Finance at the University of Melbourne, Australia. His main research interest is financial decision making by firms and investment funds, and his finance publications include three research monographs, four book chapters and nearly 30 journal articles. Les trained originally as an engineer, and spent almost 30 years in senior management positions with Anglo American and ExxonMobil Corporations in Australia and overseas.

Autoren/Hrsg.

Coleman, Les

Inhaltsverzeichnis

1;Dedication;5
2;Preface;6
3;Contents;17
4;About the Author;19
5;List of Figures;21
6;List of Tables;22
7;1: Introduction;23
7.1;1.1 Developments in Financial Markets over Recent Decades;24
7.1.1;1.1.1 Transformation of the Equity Investor Base;25
7.1.2;1.1.2 Inflation in Scale and Scope of Markets;26
7.1.3;1.1.3 Importance of Non-economic Factors in  Investment Decisions;29
7.1.4;1.1.4 Systemic Weaknesses in Financial Systems Reliability;30
7.1.5;1.1.5 Difficulty of Transitioning MPT to Investment Practice;32
7.2;1.2 Motivation and Plan of This Book;32
8;Part I: Investment Theory and Practice;34
8.1;2: Current Paradigm: Neoclassical Investment Theory;35
8.1.1;2.1 The Building Blocks of Investment;37
8.1.2;2.2 Utility Theory and Investor Risk Propensity;40
8.1.3;2.3 Capital Asset Pricing Model;40
8.1.4;2.4 Factor Models and Arbitrage Pricing Theory;42
8.1.5;2.5 Other Valuation Models;44
8.1.6;2.6 Conclusion: Useable Hypotheses of Neoclassical Investment Theory;48
8.2;3: Behavioural Biases in Investor Decisions;49
8.2.1;3.1 The Catalogue of Cognitive Investment Biases;51
8.2.1.1;3.1.1 Affect Heuristic;57
8.2.1.2;3.1.2 Anchoring and Adjustment;57
8.2.1.3;3.1.3 Asset-Liability Management;58
8.2.1.4;3.1.4 Bounding;58
8.2.1.5;3.1.5 Disposition Effect;60
8.2.1.6;3.1.6 Framing;60
8.2.1.7;3.1.7 Herding;61
8.2.1.8;3.1.8 Hindsight Bias;62
8.2.1.9;3.1.9 Homogenizing of Probabilities;62
8.2.1.10;3.1.10 Hyperbolic Discounting;63
8.2.1.11;3.1.11 Mental Accounting;64
8.2.1.12;3.1.12 Overconfidence;64
8.2.1.13;3.1.13 Prospect Theory and Situational Attitudes Toward Uncertainty and Loss;65
8.2.1.14;3.1.14 Regret Aversion;66
8.2.1.15;3.1.15 Sentiment;67
8.2.2;3.2 Could There Be a Common Behavioural Denominator?;67
8.2.3;3.3 Conclusion;69
8.3;4: Uncertainty in Investor Wealth;73
8.3.1;4.1 Background;74
8.3.2;4.2 Risk in the Finance Literature;77
8.3.2.1;4.2.1 Relationship Between Security Return and Uncertainty;77
8.3.3;4.3 Unpacking the Notion of Uncertainty and Risk in Finance;82
8.3.3.1;4.3.1 Exogenous Influences on Equity Uncertainty or Risk;82
8.3.3.2;4.3.2 Endogenous (Non-human) Influences on Uncertainty in Firm Value;86
8.3.3.3;4.3.3 Human Influences on Uncertainty in Firm Value;86
8.3.3.4;4.3.4 Governance, Ethics and Sustainability;88
8.3.3.5;4.3.5 Proxies for Uncertainty in Firm Performance;90
8.3.4;4.4 Conclusion: The Return-Uncertainty Link for Equities;91
9;Part II: Structure, Conduct and Performance of Fund Manager Investment;93
9.1;5: Building Investment Theory Using the Structure-Conduct-Performance (SCP) Paradigm;94
9.1.1;5.1 What Is a ‘Good’ Investment Theory?;95
9.1.2;5.2 Does Investment Theory Have to Be Quantitative?;97
9.1.3;5.3 Structure-Conduct-Performance (SCP) Paradigm;98
9.1.4;5.4 Conclusion;100
9.2;6: Structure of Equity Prices;101
9.2.1;6.1 Compilations of Facts in Finance;102
9.2.2;6.2 Distribution of Equity Prices;104
9.2.2.1;6.2.1 Unexpectedly High Turnover and Volatility;105
9.2.2.2;6.2.2 Patterns in Markets;106
9.2.2.2.1;6.2.2.1 Seasonal Patterns in Markets;106
9.2.2.2.2;6.2.2.2 Cyclical Features of Equity Prices;107
9.2.2.2.3;6.2.2.3 Clustering in Returns and Volatility;111
9.2.2.2.4;6.2.2.4 Tendency of Prices to Trend;113
9.2.2.3;6.2.3 Macrodrivers of Equity Returns;117
9.2.2.4;6.2.4 Other Market Behaviours;119
9.2.3;6.3 Explanations of Equity Prices;122
9.2.3.1;6.3.1 Smart Beta: Systematic Influences on the Cross Section of Stock Returns;122
9.2.3.2;6.3.2 Influence on Returns of Firm and Security Traits;124
9.2.3.3;6.3.3 Can Lagged Variables Really Predict Returns?;125
9.2.4;6.4 Unpacking the Practical Value of Price-­Sensitive Information;130
9.2.5;6.5 Factor X: The Recurrence of Unknowable Events;133
9.2.6;6.6 Conclusion;135
9.3;7: The Mutual Fund Industry: Structure and Conduct;139
9.3.1;7.1 Exogenous Structural Forces on Mutual Funds;140
9.3.2;7.2 Structural Features of the Managed Investment Industry;141
9.3.3;7.3 Mutual Fund Conduct;144
9.3.4;7.4 Conclusion;147
9.4;8: Fund Managers’ Conduct: The Story of How They Invest;148
9.4.1;8.1 Fund Manager (FM) Decision Making;149
9.4.1.1;8.1.1 Fund Managers’ Valuation Paradigm;150
9.4.1.2;8.1.2 Fund Managers Share Common Information and Analytical Techniques;154
9.4.2;8.2 The Role of Prices in Investor Utility Functions;155
9.4.2.1;8.2.1 Using Proxies to Rank Relative Valuations of Equities;157
9.4.3;8.3 Socialisation of Investment Decisions;157
9.4.3.1;8.3.1 Sourcing Information from Social Networks;158
9.4.3.2;8.3.2 Impression Management;160
9.4.3.3;8.3.3 Herding;161
9.4.4;8.4 Investor Reflexivity and Market Evolution;162
9.4.5;8.5 Conclusion;164
9.5;9: Performance of Mutual Funds;167
9.5.1;9.1 Return of Managed Funds;168
9.5.1.1;9.1.1 Unpacking Funds’ Poor Return;169
9.5.2;9.2 Integrity of Mutual Funds’ Role as Agents;173
9.5.2.1;9.2.1 Is There an Ethical Crisis in Funds Management?;175
9.5.3;9.3 Conclusion;176
10;Part III: Towards an Enhanced Theory of Investment;179
10.1;10: Piecing Together the Jigsaw: Applied Investment Theory;180
10.1.1;10.1 Central Inputs to an Applied Investment Theory;181
10.1.1.1;10.1.1 Financial Performance of Mutual Funds Has Structural Determinants;183
10.1.1.2;10.1.2 Humans Have Significant Influence over Equity Prices;184
10.1.1.3;10.1.3 Investors Incorporate Price in Utility Functions Because of Market Inefficiencies;186
10.1.1.4;10.1.4 Investor Risk Incorporates Uncertainty and Downside Loss;187
10.1.1.5;10.1.5 Investors Lack Predictive Capability, and Develop Relative Rankings of Equity Value;187
10.1.1.6;10.1.6 Three-Component Model of Equity Value;188
10.1.2;10.2 Seemingly False Assumptions;193
10.1.3;10.3 Applied Investment Theory;194
10.1.3.1;10.3.1 A Structural Perspective on Applied Investment Theory;208
10.1.4;10.4 Puzzles Resolved by AIT;211
10.1.5;10.5 AIT and the Standard Investment Paradigm;214
10.1.6;10.6 Conclusion;217
10.2;11: Real World Application of Applied Investment Theory;218
10.2.1;11.1 A Research Agenda for Applied Investment Theory;219
10.2.2;11.2 How to Teach Applied Investment Theory;223
10.2.3;11.3 Investing with Applied Investment Theory;224
10.2.4;11.4 A Better Regulatory Framework;227
10.2.5;11.5 Conclusion;228
11;Bibliography;230
12;Index;257