New Retirement Research (June 11 2018)
Research shows the weather exerts economically important impact on mood, and investors can trade profitably on daily weather.

Here are some of the latest reports, surveys, and studies related to retirement, including research on weather-based trading strategies, coaching hockey, financial news, and your FICO score.

Pulling the Goalie: Hockey and Investment Implications

They authors build a simple, but powerful and intuitive, model for when a hockey coach should pull the goalie when trailing. When the model reports that the coaches aren't doing it nearly early enough, they then ask why, and take away some key lessons for portfolio and risk management, and business in general.

The Impact of Business and Economics News on Investor Attention

Using the Pew Center's News Coverage Index, the authors build daily indices capturing the importance of newsworthy events related to business and economics (BE), government, and other topics. Days with high BE news have higher market-level absolute returns, illiquidity, trading volume, and expected volatility. Corporate earnings announced on days with higher BE news tend to have stronger announcement-window reactions and weaker post-earnings announcement drift. Consistent with attention effects related to retail investors, these effects are concentrated in firms with lower institutional ownership. The findings suggest that exogenous news events can attract investor attention to the stock market and improve price discovery.

The Promises and Pitfalls of Robo-Advising

The authors study a robo-advising portfolio optimizer that constructs tailored strategies based on investors' holdings and preferences. Adopters are similar to non-adopters in terms of demographics, but have more assets under management, trade more, and have higher risk-adjusted performance. The robo-advising tool has opposite effects across investors with different levels of diversification before adoption. It increases portfolio diversification and decreases volatility for those that held less than 5 stocks before adoption. These investors' portfolios perform better after using the tool. At the same time, robo-advising barely affects diversification for investors that held more than 10 stocks before adoption.

Does Knowing Your FICO Score Change Financial Behavior? Evidence from a Field Experiment with Student Loan Borrowers

Traditional financial literacy interventions are typically ineffective at improving financial outcomes. The authors test an alternative approach using a field experiment with over 400,000 student loan borrowers in which treatment group members received communications about the ability to view their FICO Score, a personalized metric of creditworthiness. After one year, treatment group members have fewer past-due accounts, are more likely to have at least one credit account, and have higher FICO Scores.

Are Weather-Based Trading Strategies Profitable?

The authors estimate the profitability of global index-level trading strategies formed on daily weather across 49 countries. They use ex-ante weather information combined with the statistical relationship between daily weather and country index returns to predict index returns on each day. They then form a long-short hedge strategy and a long-only strategy, and find that both strategies generate substantially out-of-sample gross profits. The long-only strategy produces more consistent annualized profits of up to 20.5%, as opposed to a mean world index return of 3.75% during 1993-2012. These findings help solidify the claim that weather exerts economically important impact on mood, and investors can trade profitably on daily weather. 

Is Early Exposure to Financial Education Associated with Positive Financial Behaviors?

Some argue that financial education courses simply do not work, and early exposure is futile. In fact, financial education courses may increase consumer confidence in their ability to correctly manage their own finances. This paper uses data from the 2015 National Financial Capability Study to analyze the relationship between when financial education occurs and the resulting financial behaviors. The authors find evidence to support the hypothesis that early exposure is associated with positive financial behaviors. 

The Effect of Myopic Behavior on Stock Market Risk Perception

The authors investigate whether myopic behavior influences respondents' risk perception of future stock market returns. Using the 2012 wave of the Health and Retirement Study, they find that investors who are myopic (follow the stock market "very closely" or "somewhat closely") are more likely to be in a higher subjective probability group that believes the market for blue chip stocks will drop by 20% or more next year. In addition, they find that older cohorts have a more accurate perception of future stock market returns compared to younger cohorts. Financial planning implications are provided.

Blue States and Red States: Business Cycle Divergence and Risk Sharing

The authors examine business cycle divergence and risk sharing within the United States and in U.S. 'regions' whose populations have consistently voted either Democrat (Blue) or Republican (Red) in national elections. They find that business cycle divergence across the states is growing, it is larger than across international borders, and it is starkest across Blue and Red regions. At the same time, they find that risk sharing among states is high, even across the political divide.

When Does The 1/N Rule Work?

The 1/N rule provides a simple way to obtain a diversified portfolio. Previous studies conclude that it often outperforms portfolios obtained from more sophisticated approaches. In this paper, they authors show that the annually rebalanced 1/N portfolio only outperforms an actively managed portfolio rebalanced at the same frequency in two out of seven major equity markets, namely the U.S. and Japanese markets, during the holding period from January 1999 to December 2016. The authors propose a simple and intuitive market-specific measure to indicate when the 1/N rule outperforms other more sophisticated portfolios.

Richard Thaler and the Rise of Behavioral Economics

Richard Thaler was awarded the 2017 Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics. In this article, the author reviews and discusses these contributions.

The Rational Yield of Financial Illiteracy

Latest SCF 2016 wave shows that 57% of US households exhibit signs of financial illiteracy, a phenomenon even among college degree holders. Despite the previous findings about mistakes associated by financial illiterates, our findings portray a picture in which financial illiterates' households actually follow the standard financial theory. Specifically, financial illiterates report that they are aware of their lack of financial knowledge, and thus they bear less financial risk and allocate less money in risky assets, and constructively less overconfident (trade less frequently).

Losers Buy Beta

The author empirically shows that investors tend to buy higher beta stocks following realized losses. This behavior is observed in institutional as well as individual investors, but is more pronounced among individual investors with lower expertise, who on an average buy a new stock with up to 15% higher beta than that of the old stock they were holding. For an agent with utility consistent with prospect theory, this behavior emerges as the optimal response to her problem of maximizing utility within a mental account.

Rationally Misplaced Confidence

The author shows that persistent underconfidence and overconfidence each arise from rational learning about one's own abilities. If an agent chooses to exert more effort when more confident and believes that greater effort reliably improves outcomes, then the agent learns away overconfidence faster than he learns away underconfidence. The agent ends up underconfident on average. In contrast, the agent ends up overconfident on average if he believes that greater effort increases his exposure to chance.

What Would You Do with $500? Spending Responses to Gains, Losses, News and Loans

The authors use survey questions about spending in hypothetical scenarios to investigate features of propensities to consume that are useful for distinguishing between consumption theories.

The Cost of Caring: Out‐Of‐Pocket Expenditures and Financial Hardship Among Canadian Carers

At some point in their lives, nearly half of Canadians aged 15 and older have been caregivers or carers to family members or friends with long-term health, disability or aging-related needs. Many of these carers spend money out-of-pocket on the care-related needs of their family member or friend, and this spending may expose carers to a higher risk of financial hardship. Although the literature on care-related out-of-pocket expenditures (OPE) is growing, we know little about the relationship between financial hardship and OPE, and the changes in financial behavior that result. Using data from a nationally representative sample of family carers age 45 drawn from Statistics Canada's 2012 General Social Survey on Caregiving and Care Receiving, we explore the relationship between care-related OPE and financial hardship and the financial behaviors, such as modifying spending, deferred savings, and borrowing, used by carers who report financial hardship.

The Canada Pension Plan Decision

The authors show that Canadians' pension timing decisions depend on the interaction among the individual's mortality risk, the (nominal) interest rate, the inflation rate, and the rate of bonus if pension is delayed. Using the mortality probability of an average Canadian, the results suggest that individuals should delay collecting their pension when the (nominal) interest rate is low. 

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