Irrational Investors’ Behavior Judging From Evidence of the Siamese Twins

• Main Authors: Chang, Che-Chia, 張哲嘉
• Other Authors: Shi-Miin Liu
• Format: Others
• Language: zh-TW
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/17066734916858886437

碩士 === 國立臺北大學 === 經濟學系 === 97 === Behavioral finance considers that psychological factors like representativeness heuristic and conservatism bias will affect investors while constructing their portfolios. Representativeness heuristic means representative information being evaluated disproportional to its share in the probability distribution. Conservatism bias implies that investors are willing to adjust their behavior based on new information, but not fast enough. This may lead to their disagreement with corporations’ random earnings, thus making stock prices deviate from their fundamental values through trading. The purpose of this study is to use the behavioral finance theory to empirically investigate price deviation causes of the Siamese twins. If markets are frictionless and arbitrage is not limited, then the law of one price would hold for the Siamese twins. We use price data of TSMC (Taiwan Semiconductor Manufacturing Company) and UMC (United Microelectronics Corporation) as samples to perform the research. It is found that price deviations between both TSMC’s and UMC’s ADRs (American Depository Receipts) and their domestic stocks are large, implying investors’ behavior styles being different in the Taiwan and American markets. And the long-lasting price deviations suggest that arbitrage is limited. Like Scruggs (2007), we define the conditional heteroscedasticity of regression residuals as noise trader risks. The risks are high in the early trading years and relatively low in the recent years for TSMC, but the opposite pattern is observed for UMC. However, for both TSMC and UMC, the price deviation patterns are similar to corresponding patterns of their noise trader risks. Therefore, noise trader risks may be the main cause of price deviations and restricted arbitrage for the Siamese twins studied.