Investor behaviour, financial markets and the international economy

Brunnermeier, Markus Konrad (1999) Investor behaviour, financial markets and the international economy. PhD thesis, London School of Economics and Political Science.

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Abstract

This dissertation focuses on analysing investor behaviour and price processes in asset markets. It consists of four self-contained essays in the areas of market microstructure, risk attitude of boundedly rational investors, and international finance. Chapter 2 provides a review of the existing literature on the informational aspects of price processes. A common feature of these models is that prices reflect information that is dispersed among many traders. Dynamic models can explain crashes and illustrate a rationale for technical/chart analysis. The second emphasis of this survey is on herding models. In Chapter 3, I have developed a multi-period trading-game that analyses the impact of information leakage. I find that a trader who receives a signal about a future public announcement can exploit this information twice. First, when he receives his signal, and second, at the time of the public announcement. Furthermore, I show that the investor trades very aggressively on the rumour in order to manipulate the price. This enhances his informational advantage after the correct information is made public. He also trades for speculative reasons, i.e. he buys stocks that he plans to sell after the public announcement. Chapter 4 provides a theoretical rationale for experimental results such as loss aversion and diminishing sensitivity. A decision maker is considered to be boundedly rational if he can not find his new optimal consumption bundle with certainty when he is faced with a new income level. This makes him more risk averse at his current reference income level. It also makes him less risk averse for a range of incomes below his reference income level. Chapter 5 considers a two country economy similar to that in Obstfeld and Rogoff (1995). We find that conclusions about whether monetary shocks lead to exchange rate overshooting and spillovers on foreign production and consumption depend crucially on the form of price stickiness.' Sticky retail prices not only allow for a profitable ‘Beggar Thy Neighbour Policy’ but also lead to exchange rate overshooting. This is not the case under sticky wholesale prices and sticky wages.

Item Type:	Thesis (PhD)
Additional Information:	© 1999 Markus Konrad Brunnermeier
Library of Congress subject classification:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
Supervisor:	Bray, Margaret
URI:	http://etheses.lse.ac.uk/id/eprint/4086

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