Two Essays on Behavioural Finance

Abstract

The object of Optimism and Lifetime Wealth Expectation is investigating optimism and the expectation on lifetime wealth. Psychological bias of human (i.e., optimism or overconfidence) has been studied in economics and finance area. However, research on the relationship between optimism and the expectation on lifetime wealth rarely exists. The data is collected through face to face interview, and I measure optimism by using subjective and objective life expectancy based on Puri and Robinson (2007). The result suggests that the expected amount of future asset is increased by the extent of one’s optimism level.

In Investor Sentiment and Bond Market in Korea, I construct sentiment index with eight economic variables reflecting investor sentiment. I use kalman filter and principal component analysis to extract common factor of those variables. Two sentiment indices are similar in broad trend, but different in detailed scale. I conduct analysis with two constructed sentiment indices to investigate the relationship with two sentiment indices and the bond market risks are similar. In order to assess the relationship between investor sentiment and risk premium of bond, I conduct VAR analysis with sentiment, term premium, default premium and convexity. The result is in line with previous study. VAR results suggest there are significant relationships with sentiment and risk premium of bond.