| This dissertation consists of three empirical essays that explore whether and how financial decision-making is influenced by some psychological factors that do not have a direct economic relevance. The hypotheses proposed here and the results obtained bring a challenge to the accuracy of the paradigm that has been dominating the theory of asset pricing, according to which investors' decisions are exclusively shaped by economic variables. Second, they represent a puzzle when interpreted in light of the Efficient Market Hypothesis.;The first essay investigates the relationship between investor mood and investment decisions. The evidence produced in the fields of psychology and behavioral finance is employed to construct a hypothesis according to which daily changes in the marginal investor's emotional state, caused by changes in ambient air pollution, would be expected to have an impact on aggregate demand in the stock market, ultimately affecting equity returns in a predictable fashion. Such a behavioral hypothesis is tested by means of a natural experiment allowed by an institutional change experienced by the Milan Stock Exchange in the middle of the 1990's. Interestingly, the empirical results do seem to provide support to such a conjecture, and the "mood effect" detected here turns out to be robust to the use of alternative air pollution proxies, estimation methods, and sets of controls. It is also shown that, despite the predictions of the efficient market theory, there exist some unexploited profitable trading strategies based on air pollution data.;The second essay extends the Seasonal Affective Disorder (SAD) hypothesis to the foreign exchange market. According to medical evidence, seasonal changes in the length of the day produce corresponding changes in human mood, which in turn is conjectured to play a role in the process that governs investment decisions. Such a framework appears to generate some neat predictions in terms of exchange rate dynamics, which are then tested using weekly data on six currencies vis-a-vis the Australian Dollar. The empirical analysis is conducted using an LSTR model, the underlying idea being that the exchange rate moves between two regimes that arise out of the divergence between the seasonal daylight cycles of the northern and southern hemispheres. The findings, in this case, only provide weak evidence in support of the hypothesis under investigation.;In the third essay, an empirical investigation is conducted to determine whether investment decisions can be affected by superstition. After discussing the mechanisms through which superstitions are conjectured to originate, the analysis focuses on a set of superstitious beliefs that, according to folkloristics, can be expected to be held by large groups of people. The behavioral hypothesis that arises out of this context is then tested using daily data from the U.S. stock market, and the outcomes seem to be consistent with the view that superstition can indeed affect investment choices. Moreover, it appears to be possible to profitably exploit some of the empirical regularities that superstitious beliefs cause in the time series of equity returns. |
