ABSTRACT The illusion of explanatory depth, which has been identified by cognitive psychologists, may play a prominent role in encouraging regulatory action. This special type of overconfidence would logically lead regulators to believe that they are aware of the relevant causes and consequences of the activities they might regulate, and of the unintended side effects of the regulatory actions they are contemplating. So, as with other cognitive biases, the illusion of explanatory depth is likely to lead to mistakes. And unlike (...) the biases that have been the focus of so much behavioral economics, the illusion of explanatory depth is uniquely resistant to correction by those who are aware of it as a general problem and rigorously attempt to keep it under control. (shrink)

This article argues that modern finance should be an important object of attention. Particularly worthy of study are three demarcations: the changing disciplinary boundary of economics, the distinction between private and public knowledge, and the legal and cultural demarcation between legitimate trading and gambling. The balance between what Barnes calls N-type and S-type terms in finance is different from, for example, that in physics, but that is no criticism of finance theory: the activities of those who disbelieve finance theory’s efficient (...) market hypothesis probably make the hypothesis more true. The case of Black-Scholes-Merton option pricing theory is drawn on to argue that the loops of self-reference intrinsic to S-terms seem predominantly performative: they increase the truth of finance theory’s typical assumptions. S-loops in the financial markets do not always promote stability, however, as is shown here by a case study of the fate of the hedge fund, Long-Term Capital Management. (shrink)

Abstract:This essay aims to bring two important lines of inquiry and criticism together. It first lays out an institutionally enriched account of what a just world economic order will look like. That account prescribes, via the requisites to that mechanism which most directly instantiates the account, “three realms of equal treatment and market completion”—the global products, services, and labor markets; the global investment/financial markets; and the global preparticipation opportunity allocation. The essay then suggests how, with minimal if any departure from (...) familiar canons of traditional international legal mandate interpretation, each of the Bretton Woods institutions—particularly the GATT/WTO and the IMF—can be viewed at least in part as charged with the task of fostering equal treatment and ultimate market completion within one of those three realms. The piece then argues that one of the institutions in particular—the World Bank—has, for reasons of at best negligent and at worst willful injustice on the part of influential state actors in the world community, fallen farthest short in pursuit of what should be viewed as its proper mandate. The article accordingly concludes that a fuller empowerment of the Bank to effect its ideal mission will press the Bretton Woods system more nearly into ethical balance, and with it the world into justice; and that full empowerment of the GATT/WTO and IMF should be partly conditioned upon the fuller empowerment of the Bank. (shrink)

Relatively little research has examined the effects of ownership on the firms’ corporate social responsibility (CSR). In addition, most of it has been conducted in the Western context such as the U.S. and Europe. Using a sample of 118 large Korean firms, we hypothesize that different types of shareholders will have distinct motivations toward the firm’s CSR engagement. We break down ownership into different groups of shareholders: institutional, managerial, and foreign ownerships. Results indicate a significant, positive relationship between CSR ratings (...) and ownership by institutions and foreign investors. In contrast, shareholding by top managers is negatively associated with firm’s CSR rating while outside director ownership is not significant. We conclude that different owners have differential impacts on the firm’s CSR engagement. (shrink)

Research on the relationship between corporate environmental performance and corporate financial performance has consistently grown and is gaining widespread attention. Given the vast body of CEP–CFP studies, recently scholars have begun to take stock of the cumulative results. However, no study so far has meta-analyzed the findings yielded by event studies assessing the stock market reactions to corporate environmental performance-related events. This paper sets out to close this gap by synthesizing previous empirical results regarding the stock market impact of positive (...) and negative CEP-related events. Results indicate a positive relationship across studies in terms of positive market reactions to positive events and negative reactions to negative events. Furthermore, the findings show that the market reactions are stronger for negative events than for positive events. Finally, this study examines whether methodological artifacts may explain the differences in the findings of the analyzed event studies. (shrink)

What can we learn from “minimal” economic models? I argue that learning from such models is not limited to conceptual explorations—which show how something could be the case—but may extend to explanations of real economic phenomena—which show how something is the case. A model may be minimal qua certain world-linking properties, and yet “not-so-minimal” qua learning, provided it is externally valid. This, in turn, depends on using the right principles for model building and not necessarily “isolating” principles. My argument is (...) buttressed by a case study from computational economics, namely, two agent-based models of asset pricing. (shrink)

The research investigates the impacts of the 2008 GFC on the securities market supervision by identifying how securities regulators have responded to the GFC, adapted to the post-crisis market conditions, and developed a more responsive supervisory structure. Implications for emerging markets are drawn based on research finding analysis. Quantitative survey research and qualitative techniques with focus group interviews and documentary research are employed in a mixed-methodology under the paradigm of critical realism to generalize the crisis impacts on SMS. Findings of (...) the research include: the GFC has generated impacts on all areas of SMS framework. Discussion is focused on a paradigm shift in SMS philosophy, re-construction of SMS architecture, emerging of risk-based approach, involvement of securities regulators in macro-prudential supervision, disputable roles of self-regulatory organizations in market conduct oversight, and re-regulation of securities products, market intermediaries, market gatekeepers and SROs; post-crisis SMS responsiveness improvement was a result of post-crisis policy reform; and developed markets and emerging markets followed the same trend of post-crisis SMS reform but their ways diverged in some areas. Post-crisis SMS paradigm shift, prevalence of integration model, choices of developed and emerging markets between twin-peaks and integration, post-crisis diminishing roles of SROs, emergence of central banks, divergence of developed markets and emerging markets in policies are explained. Critical implications were developed for emerging markets, including: comprehending the post-crisis SMS paradigm shift and developing a new SMS philosophy; dealing with the dilemma of SMS restructuring post-crisis; identifying the tasks and challenges of applying risk-based approach; and, establishing a culture of responsive SMS. Contribution of this research is significant in terms of theory, body of knowledge, methodology and literature: the research is the first that describes a comprehensive theoretical framework of SMS, defines the concept of SMS responsiveness and develops a complete SMS framework. A new SMS philosophy is recommended through analysis of research findings; the research helps to reveal the actual impacts of the 2008 GFC on SMS, develops regulatory implications and recommends components of a responsive SMS framework.; the research outcomes justifies employment of mixed methodologies; and the research also provides qualitative and quantitative data that supplements the literature of the GFC and securities supervision. Empirical evidence of the research is theoretically justified, meaningful, realistic, and discrete and is capable of verification in any further research contexts. (shrink)

The existing research aims to seek the herding effects on stock returns at the industry level in Pakistan Stock Exchange. Moreover, the relationship between stock returns and herding has been studied by taking some macroeconomic and fundamental control variables. Herding is actually imitating other’s behaviour. This phenomenon indicates a situation where the investors follow the crowed and ignores their personal information, despite knowing the correctness of their information. Herd behaviour may drive from fundamental factors leading to efficient markets. However, it (...) may not be associated with fundamental information causing unstable prices. The stock price data of PSX listed companies from 1999 to 2017 have been the point of focus. The underlying herding measure was the cross-sectional absolute deviation, proposed by Chang et al.. The significant analysis technique facilitating the current research is pooled mean group /panel autoregressive distributed lag approach. Findings revealed that some sectors are evident for positive effect of herding on stock returns, whereas some others are witnessed for its negative effects on stock returns, in both long run and short run. As far as the control variables are concerned, they demonstrated both significant and insignificant effects on stock returns in different sectors of PSX. The study has important implications for policymakers. (shrink)

The view from inside improves our understanding on market failure and regulation failure in financial market. The EMH fails to understand the causes of financial bubbles and crashes. Behavioral finance introduces insight from psychology. The heuristic and biases approach studied behavioral asymmetry in static environment that leads to market irrationality and information distortion. The fast and frugal thinking in decision-making further explore more complex situation under changing environment. They argue that soft-paternalistic regulation is needed under information overload. The most critical (...) issue is information uncertainty and complexity. Lacking information in frequency domain is the main barrier in managing business cycles. Data form inside reveals current limitations of financial data mainly in the short-term price changes. Microstructure studies show that pricing process is shaped by trading rules. Quantitative analysis reveals severe instability in high frequency trading and derivative market. Feasible regulation should aim to encourage new technology and sustainable growth, rather than protect obsolete technology and short-term speculation. The most fundamental challenge to sustainable economic order is the excessive size of the derivative markets that crowding out investment in real economy. This is a more severe issue than the climate change. (shrink)

The financial community does not seem to have shifted to greater sustainability, despite increasing awareness and concerns around social and environmental issues. This article provides insights to help understand why. Building on responsible investment data from the U.K. financial press between 1982 and 2010, the authors examine the collective beliefs which financial actors rely on to take decisions under uncertainty, as a way of understanding the status of and implications for RI mainstreaming. The analysis of collective beliefs through five periods (...) of RI leads us to define two theoretical dimensions—justifying RI and practicing RI—that characterize how mainstream actors collectively make sense of RI. The authors’ analysis reveals that the RI collective beliefs currently do not provide a favorable environment for RI mainstreaming and need to be taken into account when discussing the value of sustainability. (shrink)