Representation bias means a kind of cognitive tendency, and, for investors, it can affect their behavior in the stock market. Whether the representation bias can help the return forecast and portfolio selection is an interesting problem that is less studied. In this paper, based on the representation bias theory and current markets situation in China, a new hierarchy of stock measurement system is constructed and a corresponding set of criteria is also proposed. On each criterion, we try to measure the influence among stocks with adapted fuzzy AHP. Then the Hausdorff distance is applied to weight and compute the horizontal representation returns. For the forecast returns, according to representation behaviors, there is also a new computation method. Empirical results show that the representation bias information is useful to the return forecast as well as the portfolio selection.

/pdf/representation-bias-return-forecast-and-portfolio-selection-1hejq7u8yh.pdf

Representation Bias, Return Forecast, and Portfolio Selection in the Stock Market of China

Can Representation Bias Help the Returns Forecast and Portfolio Selection

This study reports China’s macroeconomic trends in downward pressures and discusses the effects of the ‘micro stimulus’ on the growth performance of Chinese economy. It appears that economic growth rebounds significantly in the short term every time ‘micro stimulus’ is applied, but the economy slows down again once the stimulus dwindles. China’s economic growth thus exhibits a pattern of significant ‘stimulus-dependence’. When facing economic downturn, China has only resorted to stimulus policy to sustain growth. Not surprisingly, our findings indicate that ‘micro stimulus’ cannot realize the strategic intent of growth stabilization and structural adjustment, and may even lead to more structural chaos. One problem that can be attributed to the near-sighted strategy is the worsening productivity performance since the financial crisis of 2008. Therefore both improvement in social security systems and social programs designed for maintaining long run growth are needed in order to improve productivity perform...

China’s macroeconomic trends in downward pressures: the ‘micro stimulus’ effects and steady growth

The fluctuations of capital market mainly originate from the volatility of asset price. How to understand and describe the volatility of asset price is meaningful for both the finance theory and the finance application. The attribute of investor's subjective behavior makes marked effect on asset price. This paper sets the equilibrium price of stock in capital market as a function of subjective discount factor, relative-risk-aversion coefficient, and habitual parameter, and researches the effects of the investor's behavioral parameter's fluctuations on volatility of asset price with the method of numerical simulation. The simulation outcome reveals that a little fluctuations of investor's behavioral parameter result in big fluctuations of stock price in China.

Effects of Behavioral Parameters on Volatility of Asset Prices in China

Substantial changes in price inflation rate have serious economic consequences on the welfare of consumers in an economy but the issue has not, thoroughly, been reckoned in Pakistan. The study aims at assessing the nature and extent of welfare cost of inflation (WCI), employing well-established theory of money demand for the purpose. To address the issue more deeply, high frequency biannual series of gross domestic product (GDP) have been constructed and used benefitting from earlier works, a la Arby (2008). Biannual Divisia monetary aggregate (DMA) M2 series has, specifically, been constructed along with simple sum monetary aggregate (SSMA) M2 to establish the adequacy of DMA over SSMA in measuring the WCI in the long run based on versatile money demand specifications estimated using autoregressive distributed lag model (ARDL) framework. Short-term interest rates are regressed on money income ratios for Pakistan as implied by the theory. Based on information criteria, it is shown that DMAs rendered better fit and reliable estimates and log-log specification better approximate money demand than theirs counterparts. It is found that a decrease in inflation rate from 15 to 5 percent amounts to an annual welfare gain in the range of rupees 105 to 118 billion with log-log specification entailing one of the DMA or SSMA. These estimates of WCI are actually much less than the true inflation costs borne by an economy as moral inflation costs such as corruption, suicide attempts due to joblessness, political instability, currency devaluations etc. cannot be accounted for due no concrete measurability for these attributes. The study concludes that price stability on lower prices inflation rate must be the prime goal in monetary policy, and if the government spends a few billion rupees on price stability, it will gain too much not only in lowering the rampant corruption but also in gain political, moral, and financial stability. The study recommends the construction, publication, and use of high frequency DMAs and GDP series by the SBP that will opens many avenues for further improvements in evaluating WCI.

https://www.econstor.eu/bitstream/10419/188203/1/pjcss242.pdf

Inflation welfare cost analysis for Pakistan: An ARDL approach

The essential behavior of an investor will influence his financial activities.In this paper we take the loss aversion into account and derive utility not only from terminal wealth but also from changes in financial wealth.We propose an optimal portfolio choice model based on loss aversion to maximize the expected utility,and obtain portfolio frontiers of the new model with different scaling parameters of changes in wealth through the empirical study in Shanghai stock market.

Optimal Portfolio Choice Model Based On Loss Aversion

China's economic growth slowdown will continue in the future: in the baseline model,the potential economic growth rate will decline by 2.3 and 4 percentage points in the 12th and 13th five-year plan period compared with the 2000—2010 period.The reasons are: the growth rate of export and investment will slow down distinctively;low-cost advantage will cease to exist and the growth rate of TFP will decline;government's role in promoting economic growth may be weakened.Under the situation that the society still has strong "growth dependency syndrome" in the future,the large reduction of the economic growth will seriously undermine social stability,and economic growth slowdown will also cause a huge loss of social elites.There are two ways to deal with the challenges of economic growth slowdown: First,transform the economic growth mode by administrative system reform to prevent a "hard landing",and secondly,promote social reform to strengthen social stability and reduce the dependence of the society on economic growth.

China's Economic Growth Slowdown: Reasons,Challenges,and Policy Suggestions

Inflation is always an important indicator to measure whether economy is stable and healthy. This paper provides a substantive survey of the research on the welfare cost of inflation, and uses the methods of consumer’s surplus and neo-classical general equilibrium models respectively to estimate the welfare cost of inflation in China. The results show that high inflation will cause huge welfare cost in China, so keeping low inflation is beneficial to the entire economic welfare of China.

Study of the welfare cost of infl ation in China

Research on Habit Formation and Volatility of Asset Prices

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Papers

Optimal Portfolio Choice Model Based On Loss Aversion

China's Economic Growth Slowdown: Reasons,Challenges,and Policy Suggestions

Study of the welfare cost of infl ation in China

Research on Habit Formation and Volatility of Asset Prices