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Contributions to Finance and Accounting
David Bourghelle
Pascal Grandin
Fredj Jawadi
Philippe Rozin Editors
Behavioral
Finance and
Asset Prices
The Influence of Investor's Emotions
The book series ‘Contributions to Finance and Accounting’ features the latest
research from research areas like financial management, investment, capital mar-
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David Bourghelle • Pascal Grandin • Fredj Jawadi •
Philippe Rozin
Editors
Behavioral Finance
and Asset Prices
The Influence of Investor’s Emotions
Editors
David Bourghelle Pascal Grandin
IAE Lille University School of Management IAE Lille University School of Management
University of Lille University of Lille
Lille, France Lille, France
Fredj Jawadi Philippe Rozin

IAE Lille University School of Management IAE Lille University School of Management
University of Lille University of Lille
Lille, France Lille, France
ISSN 2730-6038 ISSN 2730-6046 (electronic)

ISBN 978-3-031-24485-8 ISBN 978-3-031-24486-5 (eBook)
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Foreword
When the editors of Behavioral Finance and Asset Prices: The Influence of
Investor’s Emotions kindly asked me to write a foreword, I accepted with enthu-
siasm for two reasons: (1) the proposition was coming from friends (the role of
affect in decision-making) and (2) I thought it would be an easy task because
this field of research has been at the center of my own research work for at least
two decades. I was, however, overconfident and victim of an illusion of control
as well. Overconfident because research in behavioral finance has experienced an
exponential growth since the beginning of the century. When I finally understood
that writing this preface was a difficult task, I started to procrastinate, falsely
thinking (illusion of control) that a few days would be enough to do the job.
To sum up, the decision-making process leading me to accept writing the preface
of this book characterizes Humans, not Econs.1
When Richard Thaler was awarded the Sveriges Prize in Economic Sciences
in Memory of Alfred Nobel in 2017, a journalist asked him: “What is the most
important impact of your research?” Thaler’s answer was: “The recognition that
economic agents are human and that economic models have to incorporate that.”
This short sentence is, simultaneously, remarkably simple and remarkably complex!
Simple because, when hearing such an answer, people outside the academic circles
probably think “a Nobel prize for that . . . . unbelievable!” Complex because this
sentence summarizes a revolution in economics and finance, revolution that means
the end of the Homo economicus, or at least, the recognition that the Homo
economicus is more the exception than the rule.
Taking into account the characteristics of the Homo sapiens in finance models
takes several paths. A few decades ago, Terrance Odean paved the way for a still
growing field of research that analyzes the actual behavior of individual investors. In
this approach, researchers who aimed at understanding individual decision-making
1 We use here the vocabulary introduced by Richard Thaler to distinguish the Homo sapiens
(Humans like you and me) from the Homo economicus (Econs, that is nobody on earth, but central
in most economics books and articles).
v
vi Foreword
processes look at what people do, contrary to normative models who tell us what
people should do. Doing so allowed researchers to provide evidence of a number
of behavioral biases, understood as deviations from the expected behavior of the
Homo economicus. Numerous follow-up papers have built convincing evidence that
Sapiens is a better model of human beings than Economicus.
In fact, standard finance models are not very helpful, even in answering simple
questions like:
(1) Why do people trade (too much) financial securities?
(2) What are the drivers of portfolio choice at the individual level?
(3) Why do people consider $1 on a retirement account differently than a $1 bill in
their wallet?
(4) If conventional behavioral assumptions are not able to provide answers to the
above questions, what is the efficiency of traditional asset pricing models based
on these assumptions?
Questions 1 to 4 have been addressed in various ways in the behavioral finance
literature. For example, question 1 sometimes refers to gambling attractiveness and
sometimes to overconfidence. Both characteristics lead to trade risky securities
beyond what is expected in the conventional risk–return trade-off approach. Such
justifications of trading contradict conventional models which assume risk aversion,
always and everywhere, and correct evaluation of probability distributions, prevent-
ing investors to be overconfident.
For question 2, we need to recognize that the words “optimal portfolio choice”
or “equilibrium prices” are inevitably linked to Harry Markowitz (1952, 1959),
William Sharpe (1964), and the other fathers of conventional finance. However, it
is now well established that the behavioral assumptions of MPT (modern portfolio
theory) and the CAPM (capital asset pricing model) are not satisfied. We should
therefore teach more general “behavioral portfolio theories,” examples of which
being the “behavioral capital asset pricing theory” (Shefrin and Statman) and the
mental accounting approach (Thaler) which lead to select portfolio allocations
containing several layers of assets (a methodology commonly applied by finance
professionals).
More generally, the standard portfolio choice approach is only a specific case
of more general behavioral theories. In the Markowitz approach, people maximize
the expected value (therefore based on a probability distribution) of a function
(utility) over a given domain (the set of portfolios). A shortcut to describe general
behavioral theories is to remark that these theories deviate on one or several of the
three characteristics of the initial problem. Preferences can be different (change of
the utility function) to take into account potential risk loving and attractiveness of
lottery-like investments. The set of possible portfolios can be reduced, for example
to take into account ESG considerations or the limited cognitive ability of the Homo
sapiens. Finally, the probability distribution over which the expectation is calculated
can be changed. It is a way to include an optimism bias or the overweighting of rare
events that characterizes most people.
Foreword vii
A broader approach of the optimization problem has multiple consequences. The

empirical literature on individual portfolio choice has shown that diversification,
which is the mantra of traditional finance, is not an important driver of portfolio
construction among retail investors. All studies, especially those focusing on very
large samples of individual investors, conclude that portfolios are under-diversified.
It turns out that drivers of portfolio choice also go beyond the traditional risk–return
trade-off. Other elements, for example, investor sentiment or the perceived skewness
of returns, can play an important role in portfolio construction. Investors buying
assets with positive skewed returns hope to “hit the jackpot,” exactly like lotto
players. Humans also have a tendency to distort probabilities in an optimistic way,
therefore generating deviations between actual portfolios and theoretical portfolios.
Concerning the third question, though a $1 bill is still worth $1 when deposited
on a retirement account, the propensity to spend it decreases when it is coined
“retirement money.” This phenomenon called “mental accounting” is a strong
driver of spending and saving decisions, contrary to what is expected in the
standard economic theory. What is finally surprising in nowadays research output
is the survival of a strong strand of research based on the (unsatisfied) behavioral
assumptions of standard economic models.
At the market level, a direct consequence of alternative models of individual
behavior is the “discovery” of numerous factors that are supposed to explain
asset returns. We can wonder whether only extending the standard Fama–French
approach by adding new behavioral factors is the right way to understand asset
prices. The relevance for finance professionals of what is nowadays called the “fac-
tor zoo” may be questioned. Future research will hopefully take completely different
routes, instead of simply adapting a traditional approach built for a world populated
by Homo economicus. It could be preferable to stop considering conventional theory
as a reference and alternative theories as producers of “deviations.”
This book is one more step toward a deeper understanding of investors’ behavior
and market prices. The first three chapters illustrate, in diverse domains, that
difficulties in asset pricing not only come from the use of insufficient factor
models but also from the inability of investors to manage uncertainty (instead of
risk). Dealing with long-term and ambiguous risks (hypothetic climate change or
hypothetic pandemic risk) leads investors to use and adapt the usual probabilistic
models in specific directions, therefore distorting probabilities during emotional
shocks.
The second part of the book addresses important topics related to individual
investors, in particular investor sentiment, psychological discounting processes, and
the role of emotions in individual decisions and market pricing. The introduction
of investor sentiment in finance models is a typical example of the above reference
to “deviations” from the standard model. At the origin of investor sentiment in the
nineties was the “noise trader” who trades on noise, not on information. In the light
of the last chapter of the book, we could add that emotions like fear, excitement,
or panic are also strong drivers of individual decisions and stock returns in volatile
periods. It turns out that fundamentals often become almost useless in explaining
the dynamics of asset returns in uncertain times, a kind of paradox.
viii Foreword
Our short analysis simply shows that what we know is quite negligible, compared
to what we ignore. Therefore, the reader of this book will be smarter after turning
the last page.
University of Strasbourg, Patrick Roger

Strasbourg, France
Acknowledgments
This book is the result of the first “Investor’s Emotions and Asset Pricing
(IEAP)” meeting, organized on February 2, 2022, at IAE Lille University School
of Management. We would first like to acknowledge our considerable appreciation
for all those who contributed to the meeting, and thus, directly or indirectly, to
the publication of this book, and in particular the meeting participants (Andrea
Antico, Julian Ashwin, Cécile Bastidon, Béatrice Boulu-Reshe, Guillaume Dupéret,
Changtai Li, Kevin Lansing, Georges Prat, Fabrice Riva, Willi Semmler, and
Yamina Tadjeddine). Our thanks also go to all the authors of the book chapters
who also served as referees, in addition to external referees.
Second, we would like to thank our colleagues who provided input through their
constructive and helpful comments and feedback during the organization of the
IEPA meeting that helped to produce several papers/chapters for the book (Pascal
Alphonse, Julian Ashwin, Cécile Bastidon, Béatrice Boulu-Reshe, Jean-Gabriel
Cousin, Sébastien Dereeper, Kevin Lansing, Fabrice Riva, Willi Semmler, and
Yamina Tadjeddine). We would also like to thank all the “Expectations, Emotions
and Financial Asset Price Dynamics” Round Table participants (Clément Bour-
geois, Patrick Roger, and Yamina Tadjeddine Fourneyron) who helped to inform the
fascinating debate about investors’ emotions.
Third, we would like to thank the institutions that supported this project: IAE
Lille University School of Management and the Bank of France. In particular,
we acknowledge the financial support from our research centre LUMEN, and the
support of the Head of the ARTE axis, Prof. Sébastien Dereeper. We also acknowl-
edge the logistics support from the Research Division of LUMEN (David Duchene,
Murielle Polomack, and Sylvie Van Caeneghem), the Information Systems Depart-
ment (Bruno Dejaeger Vermeersch), and the Communications Department (Julie
Pinel and Valérie Tancré). We are also indebted to all our colleagues at IAE Lille
University School of Management for all their support and encouragement during
the completion of this book.
Fourth, we would like to thank the publisher, and especially Parthiban Kannan
and Rocio Torregrosa at Springer for their collaboration, help, and support in
producing this volume.
ix
Introduction
On February 2, 2021, we organized a one-day meeting on the topic “Investor’s

Emotions and Asset Prices” at IAE Lille University School of Management in
Lille (France) in collaboration with the Bank of France. The meeting gave several
academics, bankers, and financial professionals an opportunity to discuss recent
developments in asset pricing and behavioral finance, with a focus on investors’
emotions. This book includes the main papers presented at the meeting together
with some additional studies related to asset prices and behavioral finance.
The focus on these two topics, Asset Prices and Behavioral Finance, is important
for various reasons. First, over the last decade, financial asset prices (stocks,
derivatives, cryptocurrencies) as well as commodity (oil, gas, etc.) and metal prices
have reached record highs and shown excessive volatility. This volatility was
especially noticeable during the recent COVID-19 pandemic and in the present
period of geopolitical tension, largely caused by the war in Ukraine. Accordingly, it
is useful to discuss and explain these price dynamics, as well as their evolution and
volatility, to try and get a better handle on their main drivers.
Second, the approach known as behavioral finance, considered an alternative to
the theory of efficient capital markets (Fama 1965, 1970; Samuelson 1965), was
introduced thirty years ago, but has developed more widely over the two last decades
(Shiller 2000; Akerlof and Shiller 2009; Thaler 2015; Shiller 2019 etc.). Behavioral
finance considers that non-efficient markets along with psychology and social
influences are liable to impact investors’ decisions and consequently financial asset
prices. The behavioral finance approach was acknowledged more widely following
the attribution of the Nobel Prize in Economics to Robert Shiller and Richard Thaler
in 2013 and 2017, respectively, for their contributions to the field. Both laureates
have been critical of the hypothesis of rationality, demonstrating that psychology
and interpersonal influences are more reliable indicators of financial market dynam-
ics. Indeed, their theories have pointed to the presence of several behavioral factors
and biases that help to explain the dynamics of financial asset prices, bubbles,
market corrections, etc. This has led to a kind of competition between the efficient
market hypothesis (EMH), which explains changes in financial asset prices by short-
term adjustments carried out by rational actors (who are free from emotion and the
xi
xii Introduction
impact of culture or social relations), and behavioral finance which explains these
changes in terms of behavioral biases.2 In the EMH approach, investors are expected
to behave according to the optimizing rationality hypothesis and the neoclassical
principle of maximizing their utility function. Conversely, behavioral economists
consider that the judgment heuristics used by financial market players are tainted
by cognitive biases and that their interactions affect decision-making. Investors
are open to psychological influence and their behavior can be affected by certain
self-controlling tendencies. From this perspective, defenders of behavioral finance
have explained the dynamics of financial asset prices in various ways, including by
psychological influences, bias (i.e., mental accounting, herd behavior, emotional
bias, anchoring, and self-attribution), consensus bias, collective bias, investors’
mental and physical health, loss aversion, familiarity tendencies, and narrative ideas,
all of which can explain changes in financial asset prices and even market anomalies.
Shiller (2000), for example, referred to the theory of irrational exuberance to
explain the dynamics of the US stock market at the end of the 1980s, justifying the
US stock market euphoria during the 2000s mainly by an excess of overconfidence
and irrational exuberance. Akerlof and Shiller (2009) showed that investors are
most likely guided by their animal spirits when taking decisions, pushing them
at times to behave less rationally. Thaler (2015) showed the importance of human
miscalculations in driving investors and guiding their decision-making, while Shiller
(2019) noted how narrative ideas and stories can also drive financial markets.
Accordingly, psychology and human behavior appear to be key drivers of
financial asset prices. In particular, investor sentiment seems not only to impact
investors’ decision-making but also drives it. Indeed, according to the level of
investors’ health, their mental state changes, which has a significant impact on their
decision-making. An illustration of the linkage between stock prices and investors’
health—and consequently sentiment/emotions—can be seen in Fig. 1 which points
to high volatility of the VIX index (that captures investors’ emotions or feelings)
and a negative relationship between the VIX index and the S&P500 stock index,
suggesting that an increase in the VIX (or a decrease) is associated with a fall (or
a rise) in the US stock index. Especially interesting, if we look at the relationship
between the VIX and the S&P500 before 1990, the correlation was about -77%,
while over the last decade, it has reached the level of −81%. Overall, this correlation
remains negative, ranging between −70% and −90%.3
Our book focuses on recent developments in asset pricing and its interaction with
behavioral finance, noting the role of investor sentiment in particular. Indeed, several
empirical studies have demonstrated that feelings and emotions significantly affect
how individuals perceive their environment (Loewenstein 2000; Loewenstein et al.
2 For more details about the debate on the formation of financial asset prices and their drivers,
see the interesting interview between Eugène Fama and Richard Thaler, conducted in June 2016:
https://www.youtube.com/watch?v=bM9bYOBuKF4.
3 It is important to recall that the influence of psychological factors on investor behavior and
therefore on the financial market has long been considered accidental.

Introduction xiii
Exhibit 1: VIX and S&P 500 Historical Levels

90 6,000
VIX S&P 500
80
5,000
70
4,000
S&P 500 Level

60
VIX Level
50
3,000
40
30 2,000
20
1,000
10
0 0
Jul. 1992
Jan. 1990
Apr. 1991
Oct. 1993
Jan. 1995
Apr. 1996
Jul. 1997
Oct. 1998
Jan. 2000
Apr. 2001
Jul. 2002
Oct. 2003
Jan. 2005
Apr. 2006
Jul. 2007
Oct. 2008
Jan. 2010
Apr. 2011
Jul. 2012
Oct. 2013
Jan. 2015
Apr. 2016
Jul. 2017
Oct. 2018
Jan. 2020
Apr. 2021
Fig. 1 VIX and Stock Index Relationship. Source: S&P Dow Jones Indices LLC and Cboe.
Data from Jan. 2, 1990, to April 2022. Past performance is no guarantee of future results. Chart
is provided for illustrative purposes and reflects hypothetical historical performance. VIX was
relaunched on Sept. 22, 2003
2001; Lerner et al. 2015; Engelmann and Hare 2018). Meier (2022), for example,
recently showed the extent to which emotions play a role in investors’ preference
schemes, arguing that changes in emotions are linked to changes in attitude toward
risk over time, which could have a significant impact on prices. In the same context,
Val-Cruz et al. (2022) explored the correlation between polarities in financial market
indicators and Twitter posts. They found that the most influential Twitter accounts
during the COVID pandemic were the New York Times, Bloomberg, CNN News,
and Investing.com, showing a very high correlation between Twitter sentiment and
stock market behavior. Interestingly, emotions can be stabilizing or destabilizing
depending on the state of the market, with fields of diffusion that can be more or
less rapid over time. Phenomena such as runaway (Zhang et al. 2022) may explain
sudden accelerations and emotional regimes that can destabilize asset prices. By
selecting 4 measures of sentiment (fear, gloom, joy, and stress) that reflect both
pessimism and optimism among small investors, Griffith et al. (2020) examined
the ability of these sentiment measures to predict market returns and the effects
of such sentiment measures on market returns and volatility. They showed that the
stress sentiment measure has a small effect on market returns for a one-day lag. The
other two sentiment measures, gloom and cheer, appear to play no role in predicting
market returns. In contrast, the authors found that investor fear has a major and
lasting effect on market returns and conditional volatility.
Overall, emotions-related research has become protean, allowing us to distance
ourselves from traditional explanations of investor preferences or price formation in
terms of rational behavior. It also opens up new fields of analysis on the relationship
between a subject’s representation (sentiment) and a more collective phenomenon
on market price. Our book explores this aspect in greater depth, drawing together
xiv Introduction
recent research on asset pricing and behavioral finance conducted by eminent

international researchers from institutions in Africa, Asia, Europe, and the USA.
There are nine chapters in all, organized into two parts. The first part, called
Asset Pricing, has three chapters. Chapter 1, “Oil Price Uncertainty: Panel
Evidence from the G7 and BRICS Countries,” is coauthored by Apostolos Serletis
(University of Calgary, Canada) and Libo Xu (Lakehead University, Canada). In
this chapter, the authors analyze oil price dynamics for a large sample of countries
including the G7 and the BRICS, underscoring the high level of oil price uncertainty
and oil price shocks. They find that oil price fluctuations as well as oil price
uncertainty have a statistically negative effect on the overall factor productivity
growth of the countries under consideration. Interestingly, the impact of oil price
shocks is felt asymmetrically and nonlinearly. Investigations on the impact of oil
price shocks on the real economy have pitted several authors against one another,
including Hamilton (1983, 1996) and Kilian (2009). Indeed, while Hamilton’s work
concluded that oil price shocks may provoke and explain an economic recession,
Kilian (2009) contested this conclusion. The study by Apostolos Serletis and Libo
Xu reframes the research question, examining oil price uncertainty with reference
to the real options theory that is underpinned by investment under uncertainty.
Following a panel data investigation, the authors show the negative impact of oil
price shocks on economic activity, which is in line with Hamilton’s work. The
authors also suggest that oil price uncertainty and unexpected economic events
are factors that attract the attention of both policymakers and market participants.
Indeed, since oil is a key input for the real economy as a whole, oil volatility is likely
to induce scrutiny and even uncertainty with respect to different consumption and
investment decisions.
Chapter 2, entitled “Climate Risk and the Volatility of Agricultural Commodity
Price Fluctuations: a Forecasting Experiment,” is coauthored by Rangan Gupta
(University of Pretoria, South Africa) and Christian Pierdzioch (Helmut Schmidt
University, Germany). The contribution also analyzes commodity asset prices and
their volatility, with the authors highlighting the extreme volatility that characterizes
agricultural commodity prices. This volatility has been central to a range of investor
decisions, increasing the financialization of agricultural commodities since 2008.
Further, the authors assess whether taking climate risk factors into consideration
could help to improve the modeling and forecasting of agricultural price volatility
or not, using high-frequency data and recent findings from the heterogeneous
autoregressive realized volatility (HAR-RV) model. They conclude that the inclu-
sion of climate risk factors improves agricultural commodity volatility forecasts.
The authors explain the effects of climate risk factors on agricultural commodity
prices through their impact on financial stress and market jitters. Further, investors
and householders obviously keep a close eye on the evolution of agricultural
commodity prices as this class of commodities represents a major component of
household consumption and is a significant factor in their volatility, which could
have considerable implications for food security.
Chapter 3, entitled “Linking the COVID-19 Epidemic and Emerging Market
OAS: Evidence Using Dynamic Copulas and Pareti Distributions,” is coauthored
Introduction xv
by Imade Chitou (Aix-Marseille University, France), Gilles Dufrenot (Sciences

Po Aix and Institut Louis Bachelier, France), and Julien Esposito (Aix-Marseille
University, France). The authors examine asset pricing, with a particular focus
on the dependence of the option-adjusted spread (OAS) for several emerging
markets on the COVID-19 outbreaks over the period March 2020–April 2021.
To this end, the authors apply different classes of copulas, showing a significant
correlation between spreads and epidemiological variables (i.e., number of new
cases, reproduction rate, and death rate). They analyze this result with reference
to investor sentiment, viewing the recent pandemic crisis to be a key factor in
the behavioral biases that lead to uncertainty. This uncertainty is a key driver in
emotional experiences, characterized by panic selling or regret over decisions made,
leading to behavior that is inconsistent with the EMH and investor rationality.
Overall, the chapter puts forward a novel framework to highlight the influence of
epidemiological variables on financial asset returns during COVID-19. The link
is not explained by fundamental variables as would be assumed by the investor
rationality hypothesis which indirectly reflects the impact of investor sentiment.
The second part of the volume is called Behavioral Finance and includes
six chapters. Chapter 4, entitled “On the Relevance of Employee Stock Options
Behavioral Models,” is coauthored by Hamza Bahaji (Université Paris-Dauphine,
France) and Jean-François Casta (Université Paris-Dauphine, France). The chapter
is at the intersection between asset pricing and behavioral finance. In fact, the
authors propose a behavioral analysis for employee stock options (ESO) using the
cumulative prospect theory, the rank-dependent expected utility theory, etc. The
authors also discuss the implications of these models for the valuation of ESO,
the design of optimal ESO contracts, and the assessment of employee sentiment.
Taking the complexity associated with ESO into account, especially the complexity
related to the nature of their payoffs, which in turn depends on the behavior
exercised by the employee, the authors show that these stock options are always
long-dated nontransferable call options and are therefore held for a long time. In
addition, holding such stock options can sometimes result in hedging restrictions
and even less diversification. Accordingly, the exercise decisions of these stock
options can be driven by different factors compared to unrestricted option holders:
employee endowment, risk preferences, etc. Accordingly, the authors show that
employee exercise behavior obeys both rational and psychological drivers. These
rational factors are in line with the standard framework of the expected utility
theory and include liquidity shocks, risk diversification, etc. Psychological factors
correspond to a set of behavioral biases that affect investors’ beliefs and preferences,
e.g., anchoring, overconfidence, miscalibration, and mental accounting. Thus, these
psychological factors reflect Tversky and Kahneman’s (1992) cumulative prospect
theory. Overall, the authors conclude that this behavioral framework is more than
helpful to explain employees’ stock option patterns.
Chapter 5, entitled “The Term Structure of Psychological Discount Rate:
Characteristics and Functional Forms,” is coauthored by Aboudou Ouattara (Centre
Africain d’Etudes Supérieures en Gestion, Senegal) and Hubert de La Bruslerie
(Université Paris Dauphine, France). The authors focus on the discounted utility
xvi Introduction
theory and its usefulness in intertemporal asset pricing. In particular, they inves-
tigate the psychological discount function hypothesis that underlies intertemporal
choices. Using data provided by experimentation, the authors show the limitations
of classical functional forms for the well-known discounted utility model (i.e.,
exponential form). Instead, other psychological factors such as impatience appear to
be useful in building an alternative framework to better understand individual time
preferences. Accordingly, the authors point to the relevance of knowledge of the
psychological discount function that underlies intertemporal choices, investigating
the shape and parameters of psychological discount functions. They calibrate
the answers to different functional forms and compare various forms for each
agent, allowing for heterogeneous time discounting functions. They mainly show
the violation of the standard discounted utility theory, rejecting the assumption
of an exponential discount function, and concluding that the population under
consideration is characterized by significant heterogeneous psychological discount
functions.
Béatrice Boulu-Reshef (LEO - University of Orleans, France), Catherine
Bruneau (CES - University of Paris 1 Panthéon-Sorbonne, France), Maxime
Nicolas (CES - University of Paris 1 Panthéon-Sorbonne, France), and Thomas
Renault (CES - University of Paris 1 Panthéon-Sorbonne, France) are the coauthors
of Chapter 6 entitled “An Experimental Analysis of Investor Sentiment.” The
chapter proposes an analysis of investor sentiment based on an experiment with
a sample of professional investors to investigate the impact of languages and
emojis on investment decisions. To this end, the authors study the possible causal
link between the linguistic corpus employed in work to assess investor sentiment
and investor behavior or the decisions they make. They thus contribute to the
related literature by investigating the impact of images and visualization on investor
behavior. The authors find that while text has a significant statistical effect on
investors’ decisions, its magnitude is too small (around 1%) to conclude that there
is a significant economic impact. Further, emojis have no impact on investment
decisions. Accordingly, the authors conclude that investment decisions appear to
be driven more by fundamental information (expected return, related risk, etc.)
than by investor sentiment when the decision’s payoff and probability are known.
Their conclusion remains unchanged, even when gender, age, education, political
preferences and belief effects, the credibility of the user sending the message
(professional or individual), etc. are included. However, it is important to mention
that these findings are dependent on the capacity of the social media information
(i.e., emojis) to capture investor sentiment.
Analysis of investor sentiment is also at the center of Chapter 7, entitled “On
the Evolutionary Stability of the Sentiment Investor,” coauthored by Andrea Antico
(Institute of Economics and EMbeDS Department, Scuola Superiore Sant’Anna,
Italy), Giulio Bottazzi (Institute of Economics and EMbeDS Department, Scuola
Superiore Sant’Anna, Italy), and Daniele Giachini (Institute of Economics and
EMbeDS Department, Scuola Superiore Sant’Anna, Italy). The chapter examines
the role of investor sentiment in line with Barberis et al. (1998). However, while
Barberis et al. (1998) modeled the behavior of both underreaction and overreaction
Introduction xvii
to news under the assumption of a representative agent framework characterized by

an imperfect learning model, the authors question whether the heuristic mechanism
proposed by Barberis et al. (1998) is stable in evolutionary terms. Accordingly, they
investigate this question and compare the performance of the agent described in
Barberis et al. (1998) with an agent as a pure Bayesian competitor. In particular, the
authors test whether the biased probability updating the process in Barberis et al.
(1998) can survive when competing against a Bayesian. Overall, the authors con-
clude that investor sentiment supplants the Bayesian agent for some combinations
of parameter values, while it is driven out of the market for others.
Chapter 8 is entitled “Institutional Investor Field Research: Company Funda-
mentals Driven by Investor Attention” and is coauthored by Fateh Saci (Institut
Paul Bocuse and University of Montpellier, France) and Boualem Aliouat (Uni-
versity Côte d’Azur, France). The chapter studies the relationship between the
on-site research of institutional investors and information about the company’s
fundamentals, with a focus on investor attention. In particular, the authors analyze
the relationship between the three concepts of institutional investor field research,
company fundamentals, and investor attention. The authors find that investor
attention drives institutional investors to conduct research in addition to some
specific corporate fundamentals.
Chapter 9, entitled “What drives the US stock market in the context of COVID-
19, fundamentals or investors’ emotions?,” is coauthored by David Bourghelle
(IAE Lille University School of Management, France), Pascal Grandin (IAE Lille
University School of Management, France), Fredj Jawadi (IAE Lille University
School of Management, France), and Philippe Rozin (IAE Lille University School
of Management, France). The study investigates the excessive volatility character-
izing the US stock market during the different waves of the COVID-19 pandemic,
with the authors questioning whether this volatility might be explained by further
changes in market fundamentals (dividend, profit, interest rate, etc.), changes
in macroeconomic variables (unemployment rate, inflation rate, interest rate), or
whether it is instead due to the impact of certain behavioral factors. To this end,
the authors propose a sequential econometric model. They propose a nonlinear
multifactorial model that reproduces the dynamics of the US market in which
financial factors play a key role whatever the regime, while the impact of behavioral
factors appears more significant only in the second regime when investors’ anxiety
exceeds a given threshold. Further, the forecasting performance analysis shows the
superiority of the nonlinear multifactorial model in forecasting the dynamics of the
US stock market. This finding is in line with the very interesting interview between
Eugène Fama and Richard Thaler on June 30, 2016 (https://www.youtube.com/
watch?v=bM9bYOBuKF4), giving greater credence to Thaler’s argument in favor
of behavioral finance.
David Bourghelle
Pascal Grandin
Fredj Jawadi
Philippe Rozinv
xviii Introduction
References
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Contents
Part I Asset Pricing

Oil Price Uncertainty: Panel Evidence from the G7 and BRICS
Countries . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 3
Apostolos Serletis and Libo Xu
Climate Risk and the Volatility of Agricultural Commodity Price
Fluctuations: A Prediction Experiment . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 23
Rangan Gupta and Christian Pierdzioch
Linking Covid-19 Epidemic and Emerging Market OAS:
Evidence Using Dynamic Copulas and Pareto Distributions . . . . . . . . . . . . . . . . 45
Imdade Chitou, Gilles Dufrénot, and Julien Esposito
Part II Behavioral Finance

On the Relevance of Employee Stock Option Behavioral Models . . . . . . . . . . 85
Hamza Bahaji and Jean-François Casta
The Term Structure of Psychological Discount Rate:
Characteristics and Functional Forms . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 103
Aboudou Ouattara and Hubert de La Bruslerie
An Experimental Analysis of Investor Sentiment . . . . . . . .. . . . . . . . . . . . . . . . . . . . 131
Béatrice Boulu-Reshef, Catherine Bruneau, Maxime Nicolas,
and Thomas Renault
On the Evolutionary Stability of the Sentiment Investor . . . . . . . . . . . . . . . . . . . . 155
Andrea Antico, Giulio Bottazzi, and Daniele Giachini
xix
xx Contents
Institutional Investor Field Research: The Company’s

Fundamentals Are Driven by Investor Attention .. . . . . . . .. . . . . . . . . . . . . . . . . . . . 175
Fateh Saci and Boualem Aliouat
What Drives the US Stock Market in the Context of COVID-19:
Fundamentals or Investors’ Emotions?.. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 195
David Bourghelle, Pascal Grandin, Fredj Jawadi, and Philippe Rozin
About the Editors
David Bourghelle is Associate Professor of Finance at IAE Lille University School

of Management. He holds a PhD in Finance and an accreditation to direct research
(HDR) from the University of Lille. He has conducted research in the areas of
behavioral finance, financial convention theory, and financial market microstructure,
as well as the integration of extra-financial information in asset valuation and
sustainable finance.
Pascal Grandin is Professor of Finance at IAE Lille University School of Manage-
ment and a member of the Lille University Management Lab. His area of expertise
includes portfolio management, market efficiency, and behavioral finance. He has
written several articles and books in these areas.
Fredj Jawadi is Professor of Finance and Econometrics at IAE Lille University
School of Management. He is Fellow of the Society for Economic Measurement
(SEM): https://sem-society.org/fellows/ and Charter Fellow at the INDI: http://
icemr.ru/fellows-at-indi/. He has conducted research in asset pricing, behavioral
finance, and applied econometrics and has published several books and papers in
these areas.
Philippe Rozin is Associate Professor at the University of Lille. His work focuses
on energy markets (especially oil and gas), behavioral finance, and electronic
currencies. He has conducted research on energy price volatility, the impact of
sentiment on financial markets, and cryptocurrencies, among other topics.
xxi
Part I
Asset Pricing
Oil Price Uncertainty: Panel Evidence
from the G7 and BRICS Countries
Apostolos Serletis and Libo Xu
Abstract This chapter investigates the effects of oil price uncertainty and oil price
shocks on total factor productivity growth in the G7 and BRICS countries. It shows
that oil price uncertainty has negative and statistically significant effects on total
factor productivity growth and that positive (negative) oil price shocks decrease
(increase) the TFP growth rate in the G7 countries but have the opposite effects in
the BRICS countries. Moreover, oil price shocks have in general asymmetric effects
on total factor productivity growth in the G7 countries but symmetric effects in the
BRICS countries.
Keywords Oil price uncertainty · Oil price shocks · Panel GARCH-in-Mean

VAR
JEL Classification C32, E32, G31
1 Introduction
There is an ongoing debate in macroeconomics about the effects of oil price shocks
on the level of economic activity. As Serletis and Xu (2019, p. 1045) recently put
it, “those of the view that positive oil price shocks have been the major cause of
recessions in the United States (and other oil-importing countries) as, for example,
Hamilton (1983, 1996, 2011), Hooker (1996), and Herrera et al. (2011), appeal
to models that imply asymmetric responses of real output to oil price increases
A. Serletis ()
Department of Economics, University of Calgary, Calgary, AB, Canada
e-mail: Serletis@ucalgary.ca; https://econ.ucalgary.ca/profiles/162-33618
L. Xu
Department of Economics, Lakehead University, Thunder Bay, ON, Canada
© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 3

D. Bourghelle et al. (eds.), Behavioral Finance and Asset Prices, Contributions
to Finance and Accounting, https://doi.org/10.1007/978-3-031-24486-5_1
4 A. Serletis and L. Xu
and decreases. These models are able to explain larger economic contractions in
response to positive oil price shocks and smaller economic expansions in response
to negative ones. On the other hand, those of the view that positive oil price shocks
do not cause recessions as, for example, Kilian (2009), Edelstein and Kilian (2009),
and Kilian and Vigfusson (2011a,b), appeal to theoretical models of the transmission
of exogenous oil price shocks that imply symmetric responses of real output to oil
price increases and decreases. These models cannot explain large declines in the
level of economic activity in response to positive oil price shocks.”
There is also a series of recent papers that look at the relationship between the
price of oil and the level of economic activity, focusing on the role of uncertainty
about the price of oil—see, for example, Elder and Serletis (2010, 2011), Bredin
et al. (2011), Rahman and Serletis (2011, 2012), Pinno and Serletis (2013), Jo
(2014), Elder (2018), Serletis and Mehmandosti (2019), Serletis and Xu (2019),
and Balashova and Serletis (2021). They appeal to the real options theory, known
as investment under uncertainty, which predicts that firms are likely to delay
making irreversible investment decisions in the face of uncertainty about the price
of oil. See, for example, Bernanke (1983), Brennan and Schwartz (1985), Majd
and Pindyck (1987), Brennan (1990), Gibson and Schwartz (1990), and Dixit and
Pindyck (1994). These papers find that oil price uncertainty has a negative and
statistically significant effect on the level of economic activity.
Most of the literature on the macroeconomic effects of oil price shocks and oil
price uncertainty uses time series data for individual countries. In this chapter, we
extend the Elder and Serletis (2010) bivariate structural GARCH-in-Mean VAR to a
panel context. In doing so, we use data for each of the G7 and BRICS countries and
investigate the effects of oil price uncertainty and oil price shocks on total factor
productivity (TFP) growth. We find that oil price uncertainty has a negative and
statistically significant effect on total factor productivity growth, consistent with
most of the earlier literature that uses time series data for individual countries
and reports negative effects on the level of economic activity. We also find that
positive (negative) oil price shocks decrease (increase) the TFP growth rate in the G7
countries but have the opposite effects in the BRICS countries. Moreover, we find
that oil price shocks have in general asymmetric effects on total factor productivity
in the G7 countries but symmetric effects in the BRICS countries.
Oil price uncertainty is one factor that attracts the attention of market participants
and policymakers, along with other indicators such as sentiments and unexpected
economic events. It signals the uncertainty associated with various consumption and
investment decisions since oil is a key input for real economic activity. Therefore,
this chapter explores how oil price uncertainty impacts two groups of countries that
are important representatives of the global economy, the G7, and the BRICS.
Oil Price Uncertainty: Panel Evidence from the G7 and BRICS Countries 5
The rest of this chapter is organized as follows. Section 2 presents the Elder and
Serletis (2010) bivariate structural GARCH-in-Mean VAR model in a panel context.
Section 3 briefly discusses the data, and Sect. 4 presents the empirical results for
each of the G7 and BRICS groups of countries. The final section concludes this
chapter.
2 The Panel Structural VAR Model
We extend the Elder and Serletis (2010) bivariate structural GARCH-in-Mean VAR
to a panel context for our investigation of the effects of oil price shocks and oil price
uncertainty on total factor productivity growth as follows:

k
Bzj t = C j +
. i zj t −i + j ho,j t + j t (1)
i=1

h ln ojt 0
j t t −1 ∼ 0, H j t , H j t = ,
0 h ln T F P jt
where .zj t is a column vector in the change in the real price of oil, . ln oj t , and the

TFP growth rate, . ln T F P j t , of country j , .zj t = ln oj t ln T F P j t . Also,
10 γ γ 0 0
B=
. ; i = i,11 i,12 ; j = ;
b1 γi,21 γi,22 ψj 0

h ln ojt ln ojt
ht = ; j t = .
h ln T F P j h ln T F P jt
The system is identified, as in Elder and Serletis (2010), by assuming that the
diagonal elements of .B are unity, that .B is lower triangular, and that the structural
shocks, . t , are uncorrelated. We allow the intercept terms to be different across the
countries in each of the G7 and BRICS groups to accommodate some degree of
heterogeneity, and assume the following specification for the oil price variance for
each country j
2
h ln ojt = dj 11 + dj 12
. ln ojt−1 + dj 13 h ln ojt−1 . (2)
We also assume that the TFP variance is constant to reduce the complexity of
the model in the estimation part. Thus, our panel bivariate structural GARCH-in-
Mean VAR model is effectively a multivariate GARCH model applied to a panel
data set. Technically, this is a seemingly unrelated system with GARCH error
processes, and we assume that the dynamics for individual countries in each of
the G7 and BRICS groups are similar—see also Cermeno and Grier (2006) and Lee
(2010).
3 The Data
We estimate the bivariate structural GARCH-in-Mean panel VAR model, consisting

of Eqs. (1), (2), using annual data for the G7 countries over the period from 1954
to 2019 and for the BRICS countries over the period from 1994 to 2019. For the
total factor productivity series, .T F Pt , we use the constant price TFP series from the
Penn World Table 10.0 in Feenstra et al. (2015). For the oil price series, .ot , we use
the spot price of WTI from FRED. We convert it into real terms for each country
j by using the exchange rate and price level from the Penn World Table 10.0 as
well.
4 Panel Evidence
4.1 The G7 Countries
We estimate the model for .k = 4 in Eq. (1), using the logarithmic first differences of
the data, . ln T F Pj t and . ln oj t . The estimation results are reported in panel A of
Table 1. We find that oil price uncertainty has a negative and statistically significant
effect on the TFP growth rate in all countries. Moreover, the magnitude of the effect
is different across the G7 countries. In particular, oil price uncertainty has the largest
negative effect on TFP growth in Italy (.ψ̂ = −17.339 with a p-value of .0.000) and
the smallest effect in the United Kingdom (.ψ̂ = −0.380 with a p-value of .0.000)
followed by the United States (.ψ̂ = −0.895 with a p-value of .0.000).
We plot the impulse response functions in Figs. 1, 2, 3, 4, 5, 6, 7 for each of the
G-7 countries to assess the dynamic response of the TFP growth rate to oil price
shocks. They are obtained based on an oil price shock that is the unconditional
standard deviation of the change in the real price of oil of each country. We report
Fig. 1 Impulse responses for Canada
the impulse responses of the TFP growth rate to both positive and negative oil price
shocks to address the issue of whether the relationship between TFP and the real
price of oil is symmetric or asymmetric.
As can be seen in Figs. 1, 2, 3, 4, 5, 6, 7, the dynamic response of the TFP
growth rate to an oil price shock is different across the G7 countries. The impulse
response functions indicate that a positive oil price shock decreases the TFP growth
rate, whereas a negative oil price shock increases the TFP growth rate. Moreover,
Fig. 2 Impulse responses for France
the impulse response functions in Figs. 3, 5, and 7 are symmetric, suggesting that oil
price shocks have symmetric effects on the TFP growth rate in Germany, Japan, and
the United States. The impulse response functions in Figs. 1, 2, 4, and 6 appear to
be asymmetric, suggesting that oil price shocks have asymmetric effects on the TFP
growth rate in Canada, France, Italy, and the United Kingdom, with the negative
effects of positive oil price shocks being relatively persistent.
Fig. 3 Impulse responses for Germany
4.2 The BRICS Countries
The key parameter estimates, .ψ̂, for the BRICS countries are reported in panel B of
Table 1. The estimates of .ψ also confirm a negative effect of oil price uncertainty
on the TFP growth rate in each of the BRICS countries. The magnitude of .ψ̂
is about the same as for the developing countries, excluding Russia (for which
.ψ̂ = −3.388 with a p-value of .0.001). This is consistent with the evidence in
Fig. 4 Impulse responses for Italy
Azad and Serletis (2022) who show that oil price uncertainty has negative and
statistically significant effects on the real output of the seven largest emerging
market countries (EM7)—Brazil, China, India, Indonesia, Mexico, Russia, and
Turkey.
Fig. 5 Impulse responses for Japan
Regarding the impact of oil price shocks on the TFP growth rate, we report
the corresponding impulse response functions in Figs. 8, 9, 10, 11, 12. All the
impulse response functions are symmetric, consistent with the evidence in Azad
and Serletis (2022) for the EM7 countries. Also, as can be seen, a positive oil
price shock increases the TFP growth rate in the developing countries. This result
seems counterintuitive, indicating that other factors (such as, for example, the global
business cycle) account for the procyclical behavior of oil prices in the BRICS
countries.
Fig. 6 Impulse responses for the UK

Fig. 7 Impulse responses for the United States

Table 1 Maximum likelihood estimates of .ψ

Country .ψ estimate (p-value)
A. G-7 countries
Canada .−7.643 .(0.000)
France .−1.596 .(0.000)

Germany .−1.781 .(0.000)
Italy .−17.339 .(0.000)

Japan .−1.368 .(0.000)
United Kingdom .−0.380 .(0.000)
United States .−0.895 .(0.000)

B. BRICS countries
Brazil .−1.402 .(0.000)
Russia .−3.388 .(0.001)

India .−1.058 .(0.000)
China .−0.929 .(0.000)

South Africa .−0.604 .(0.031)
Notes: Sample period, annual data: 1954–2019 for the G-7 countries; 1994–2019 for the BRICS
countries. Numbers in parentheses are p-values
Fig. 8 Impulse responses for Brazil

Fig. 9 Impulse responses for Russia

Fig. 10 Impulse responses for India

Fig. 11 Impulse responses for China

Fig. 12 Impulse responses for South Africa
5 Conclusion
We extend the Elder and Serletis (2010) bivariate structural GARCH-in-Mean VAR
to a panel context and investigate the effects of oil price uncertainty and oil price
shocks on total factor productivity growth in the G7 and BRICS countries. Our
evidence shows that oil price uncertainty has negative and statistically significant
effects on total factor productivity growth and that positive (negative) oil price
shocks decrease (increase) the TFP growth rate in the G7 countries but have the
opposite effects in the BRICS countries. We also find that oil price shocks have in
general asymmetric effects on total factor productivity growth in the G7 countries
but symmetric effects in the BRICS countries.
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1064
Climate Risk and the Volatility
of Agricultural Commodity Price
Fluctuations: A Prediction Experiment
Rangan Gupta and Christian Pierdzioch
Abstract Using the Heterogeneous Autoregressive Realized Volatility (HAR-RV)

model as a modeling platform, we study whether climate-risk factors help to predict
the realized volatility of movements of agricultural commodity prices. Our main
finding is that climate-risk factors improve the predictive performance of the HAR-
RV model mainly at longer prediction horizons (month or beyond). Our main finding
is robust to estimating the HAR-RV model by the ordinary least squares technique,
and to using various shrinkage estimators. We discuss the implications of our results
for policymakers and investors.
Keywords Climate risks · Realized volatility · Agricultural commodities ·

Prediction
JEL Classification: C22, C53, Q02
1 Introduction
Agricultural commodities have experienced enormous price swings since 2008,

resulting in the market being highly volatile (Greb and Prakash 2015). In this
regard, Johnson (2011) suggests that the increased volatility is primarily the result of
We would like to thank two anonymous referees for many helpful comments. However, any
remaining errors are solely ours.
R. Gupta
Department of Economics, University of Pretoria, Hatfield, South Africa
e-mail: rangan.gupta@up.ac.za
C. Pierdzioch ()
Department of Economics, Helmut Schmidt University, Hamburg, Germany
e-mail: macroeconmoics@hsu-hh.de
© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 23

D. Bourghelle et al. (eds.), Behavioral Finance and Asset Prices, Contributions
to Finance and Accounting, https://doi.org/10.1007/978-3-031-24486-5_2
24 R. Gupta and C. Pierdzioch
climate risks, with other important factors being the production of biofuels, market
speculation, and also rising demand coupled with declines in food stocks. Climate
risks typically are categorized into physical risks (for example, rising temperatures,
higher sea levels, more destructive storms or floods, or more severe wildfires) and
transition risks (such as climate policy changes, i.e., carbon taxation, emergence of
competitive green technologies due to innovation, shifts in consumer preferences).
It follows that every future scenario includes climate-related financial risks (Giglio
et al. 2021). With many studies suggesting that agricultural markets have become
increasingly financialized since 2008 (see the discussion in Aït-Youcef (2019)),
climate risks are also likely to indirectly enhance agricultural market volatility via
their impact on financial stress and market jitters.
In the wake of an increased financialization, which caused institutional investors
to increase their holdings in agricultural commodities, proper modeling and pre-
diction of volatility of agricultural commodity prices is required as a key input
to investment decisions, portfolio allocation, risk management, derivatives pricing,
and evaluation of hedging performance. At the same time, because agricultural
commodities represent a major component of household consumption, volatility
of their prices is likely to have substantial implications for food security, which
affects primarily the poorer part of the population (Ordu et al. 2018). Hence, it is
of paramount importance to develop models that help policymakers and investors
to accurately predict the volatility of the returns of agricultural commodity prices,
such that policy institutions can prepare for periods of large price fluctuations, and,
in turn, to design preventative policies (Greb and Prakash 2017).1
Given the importance of modeling and predicting the volatility of agricultural
commodity prices, and given that rich information contained in intraday data
can produce more accurate estimates and predictions of daily (realized) volatility
(McAleer and Medeiros 2008), we augment the Heterogeneous Autoregressive
(HAR) model developed by Corsi (2009) to include climate-risk factors to model
and predict the realized daily variance (RV), as computed from 5-min-interval data,
of 15 (cocoa, coffee, corn, cotton, feeder cattle, lean hogs, live cattle, lumber, oats,
orange juice, soybean, soybean meal, soybean oil, sugar, and wheat) important
agricultural commodities returns over the period from September 2008 to November
2019. The climate-risk factors have been recently constructed by Faccini et al.
(2021) using advanced methods imported into economics from the computational-
linguistics literature. The climate-risk factors consist of daily proxies of physical and
1 The increased financialization of agricultural commodity markets recurrently has led to concerns
that speculation destabilizes agricultural commodity markets and leads to increased volatility. In a
recent study, Brunetti et al. (2016) address such concerns by studying data for corn, crude oil, and
natural gas future markets from the period 2005–2009. They find that volatility is negatively related
to hedge fund position changes. Their findings, thus, suggest that hedge funds do not destabilize
futures markets. Moreover, hedge fund activity appears to improve price discovery. Brunetti et al.
(2016) also report that swap dealer activity does not cause contemporaneous volatility and returns.
Climate Risk and the Volatility of Agricultural Commodity Price Fluctuations:. . . 25
transition climate risks. Note that we concentrate on an analysis based on a rolling-

as well as a recursive-estimation window to account for time-varying predictability.
Besides the importance of this issue from a statistical perspective, understandably,
such quasi real-time predictions of the volatility of agricultural commodities, rather
than a full-sample-based predictive analysis, are more valuable for investors and
policymakers in making their respective decisions in an optimal manner.
In this context, it is important to emphasize that using RV to measure the
volatility of returns of agricultural commodity prices has the key advantage that
we can build our empirical analysis on an observable and unconditional metric
of “volatility” (unlike the generalized autoregressive conditional heteroscedastic
(GARCH) and stochastic volatility (SV) models that many researchers have used
to model and forecast agricultural commodity price volatility),2 which is a latent
process. We must also point out that the benchmark HAR-RV framework can cap-
ture long-memory and multi-scaling properties of agricultural commodity returns
volatility, despite having a simplistic structure, and, hence, its popularity in the
literature.
To the best of our knowledge, ours is the first empirical study that sheds light
on the predictive value of climate-risk factors for the RV of multiple agricultural
commodity price returns, and, thereby, contributes to a growing number of papers
that rely on the usage of the HAR-RV model and predictors such as realized jumps
and speculation for prediction RV of agricultural commodities (see, for example,
Tian et al. (2017a,b), Yang et al. (2017), Degiannakis et al. (2022), Luo et al. (2022),
Marfatia et al. (2022)).3 In this regard, we believe that the information contained in
climate risks actually encompasses those of volatility jumps and speculation. The
latter is captured via the climate-finance nexus and, hence, speculative activities
in the financialized commodity market. As far as the former is concerned, recent
studies (see Demirer et al. (2022) for a discussion in this regard) have indicated
that climate risks can successfully serve as an empirical proxy of the theoretical
concept of rare-disaster risks. With the key assumption underlying rare-disaster
models being that the entire universe of assets in an economy is exposed to an
aggregate jump-risk factor (Barro 2006, 2009), one can expect climate risks to also
2 See Degiannakis et al. (2022) and Luo et al. (2022) for detailed discussion of this literature.
3 Chatziantoniou et al. (2021) use a HAR-RV model to forecast the monthly RV, rather than
daily values of the same derived from intraday data, of agricultural commodities based on the
volatility of oil. Unlike widespread in-sample evidence of volatility spillovers between agricultural
commodities and the oil market (Luo and Ji 2018), the authors could not detect out-of-sample
forecasting gains emanating from both monthly and daily (which involved a mixed data sampling
(MIDAS)) metrics of oil price volatility.
26 R. Gupta and C. Pierdzioch
capturing such jump risks in agricultural commodity prices, which in turn are known
to be important component of volatility (Giot et al. 2010).
At this stage, we must emphasize that we estimate our HAR-RV models using not
only ordinary least squares (OLS), but we also use three different popular shrinkage
estimators (the least absolute shrinkage and selection operator (Lasso) estimator, the
Ridge-regression estimator, and an elastic net; see the textbook by Hastie et al. 2009)
for the version of the model that includes all climate-risk factors simultaneously.
We organize the remainder of our paper as follows: We describe the data in
Sect. 2 and our prediction models in Sect. 3. We report our prediction results in
Sect. 4, and we conclude in Sect. 5.
2 Data
We obtained the data on the realized volatility of returns of the 15 agricultural

commodities from Risk Lab, which, to the best of our knowledge, is the only
publicly available source of robust estimates of realized volatility associated with
agricultural commodity markets. For a comprehensive discussion of how the data
were collected and transformed, we refer a reader to the Internet page of Risk Lab.4
For our analysis, it suffices to mention a few key properties of the data. Risk Lab
collects trades at their highest frequencies available. It then cleans the data using
the prevalent national best bid and offer that are available, up to every second. The
estimation procedure for realized volatility is based on the methodology outlined in
Xiu (2010). The estimation procedure uses quasi-maximum likelihood estimates of
volatility, building on moving-average models. Considering only days with at least
12 observations, Risk Lab samples non-zero returns of transaction prices up to their
highest frequency available.
For our prediction experiment, we use estimates of realized volatility based on
5-min subsampled future returns associated with GLOBEX hours of cocoa (CC),
soybean oil (BO), corn futures (C), cotton No. 2 (CT), feeder cattle (FC), coffee
“C” (KC), lumber (LB), live cattle (LC), lean hogs (LH), orange juice (OJ), oats
(O), sugar No.11 (SB), soybean meal (SM), soybean (S), and Chicago Board of
Trade (CBOT) wheat (W). Based on data availability, we study the sample period
of 09/22/2008 to 11/29/2019 for BO, C, CC, CT, KC, OJ, S, SB, SM, W, and from
07/27/2015 to 11/29/2019 for FC, LB, LC, LH, O, with the start date determined
by the realized volatility series of the agricultural commodities, and the end date
4 Risk Lab is maintained by Professor Dacheng Xiu at Booth School of Business, University
of Chicago. The data are downloadable from the following Internet page: https://dachxiu.
chicagobooth.edu/#risklab.
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less than ¾ inches nor more than 1 inch, made up. The front of such
a collar may be run straight upward with a line parallel to the front
line of 135 deg., but may be shaved backward on top according to
regulation or taste.
The place for the shoulder straps on military or society coats is the
spot between the lines represented by 60 deg. from the front and 60
deg. from the back, which space of 7½ deg. represents the top of the
shoulder. For practical purposes, use the back part of Dia. II for such
a coat, and shape the front like Dia. I.
This Dia. I is made to show all the angles which start from the
point of 135 deg., and which are required for a coat or vest. That
angle which forms the shoulder seam, and which is also marked
square of 20½, is 45 deg. from the center of back, but for some
reason it was forgotten to be so marked. The lines of this diagram
may be used to draw the angles for any coat or vest, by simply
making them long enough for the size required, the same as in Dia.
XII-A. Drawn long enough to cover both shoulders, as shown in Fig.
I, the outside lines of this angle of 135 deg. is to be used to measure
the shoulders as well as to draw all the other lines, or angles for
drafting.
A circle drawn from this point, with a half diameter of 8 inches, will
be large enough, and it may be cut out of solid paste-board, but
better, of tin or zinc on which the lines are correctly drawn. The
location of the forepart and shoulders is the same as in Dia. II, or any
other diagram. The back and the sidepiece on the square of 20½ are
in a different position only. The front is just as good as any diagram
can be made for a military or for a clergyman’s coat, when placed as
in Dia. II. The back and the sidepiece is for illustration only.
That back which rests on the angle of 135 deg. is in all respects
correct, but the back which rests on the sidepiece has one incorrect
line, and this is the line forming the shoulder seam. It is correct at the
armhole, but should run up to the point of the square of 20½, so that
all three lines meet, and it will be found that from that point, down to
line 9 over the front, will be 14⅜, but line 9 itself gives the correct
distance from the top and back corner of the square.
By close observation it is also seen that the height of back above
line 9 is only ⅜ more in Dia. I than it is in Dia. IV, or on the vest, and
also that the side of the back of Dia. I is reduced again in length ½
inch by a gore from the armhole to the shoulder blade, all of which
proves that both coat and vest are the same thing on the same
square, and that the heights of back and front are the same, and in
order that the vest is covered by the coat, the neckhole for the vest is
cut ½ lower.
If everything is considered at the waist, the coat is only a trifle
larger than the vest, and that, what the front of a coat has more than
a vest, is used for the lapel. Though Dia. I has a square of 20½, and
Dia. IV has only a square of 20, both have the same width when all
the seams are sewed up. All of which shows that, as the coat must
pass over the vest, the vest must be cut at least one size smaller
than the coat, and I have found it correct. In other words: The
difference between the breast measure over the vest, and that under
the vest, is about 1 inch in the whole breast measure. Dia. I gives a
good deal of information, though it may be useless for practical
cutting.
Dia. I.
DIA. II.
This is a plain double-breasted frock; and the diagram is plain and
requires little extra description, except the front of the waist and
lapel. The fore-part has no gore at the waist, and the reduction is
made in front. It will be seen that the double-breasted front of Dia. II
is only about 1 inch wider than the single-breasted front of Dia. I, and
that the gore in Dia. I is balanced in Dia. II by the large gore between
the lapel and fore-part upward, and if it is desired to cut a small gore
at the waist, then all what that gore takes up must be allowed in
front.
The lapel in Dia. II will roll anywhere down to the second or third
button, but if a gore is cut at the waist the roll will go down to the
waist seam; and if the collar is pretty well rounded in front the lapel
may be run down to the bottom. All frock coats have the center of the
back pretty well thrown out at the bottom of the skirt, and this extra
width is again reduced between the back and front skirt, which
operation allows that seam to be oval-shaped in order to fit over the
seat. The frock coat, being open behind, must receive its oval form
over the seat in the seam between the back and front skirt, because
that seam is sewed together and will hold its shape, whereas if the
roundness were placed in the center behind it would simply produce
a curved edge, but not an oval shape for the seat. The lap between
the forepart and the skirt represents the extra length over the oval
chest, and for a full chest, and if the chest is not very full, the lap of 1
number may be reduced to ½ at the front edge, but must remain 1
number at the plumb line base.
Dia. II is intended for the normal form, and for the following
measure; Breast, 35; waist, 32; hip, 34; seat, 36; length of legs, 32 to
33; form straight without being over-erect. The back and the
sidepiece is intended for a close fit, or as fine work ought to fit. If a
looser fit is required, the gores between the back and the sidepiece
and between the fore-part and the sidepiece should be made a trifle
smaller from the hollow of the armhole downward, which will give
greater ease to the armhole and is better than to cut the armhole
more forward. If a waist is prominent, say nearly as large as the
breast, the underarm gore may be made as small as ⅛ to ¼ at line
17½ and run out to nothing at line 20; while a very large waist may
require a lap of 1 inch, at the waist seam, starting said extra width at
the bottom of the armhole.
This diagram shows the sleeve and the armhole different than Dia.
VII. The armhole is cut out to the front sleeve base line and the
sleeve and the armhole laps 2½ at 60 deg., all of which gives both
armhole and sleeve a trifle larger and that armhole requires not so
much stretching as that of Dia. VII. The top sleeve and armhole nicks
are connected by a right angle from the center of back through the
angle of 60 deg., and they will fit pretty close together, and in fact
may be taken together on all sleeves and armholes, basting forward
and backward to meet the other nicks.
Note: Elsewhere it is stated, that Dia. II must be considered the
parent pattern of all others, which is quite true, though the armhole of
Dia. II is larger than the others.
Further: In cutting the gore between the back and sidepiece,
point 5 must be quite slightly touched by both, and it may be better to
have ⅛ gore there on all coats except for the stooping form. See Dia.
II B.
DIA. II.
DIA. III.
This diagram is also made for illustration only, for it would be too
complicated for practical cutting. It is made for the purpose of
showing the correct position of the back and sidepiece for cutting a
sack coat without changing any balance in the armhole. The
sidepiece is so placed that it will form a spring at the side of the hip,
and the back and sidepieces are lapped over on top enough to
balance one seam, leaving the sack as a three seamed garment.
The top of the back skirt and bottom of the sidepiece lap over, and
which lap represents the extra length that the frock coat requires
while passing closer to the hollow of the body. On the sack coat the
spring over the hips is not used, nor is the larger frock coat gore
behind, but between the two the sack seam is cut with a gore of
about 1½ numbers at the hollow of the waist.
In placing the sidepiece in position, as in Dia. III, the back part of
the sidepiece on the shoulder blade falls backward and enlarges the
square ½, and for this reason the three-seamed sack coat has a
square of 18, or the same as a five-seamed frock.
In turning the sidepiece down into the waist, the top of the
sidepiece will fall down behind and form the spring between it and
the skirt, and consequently the whole frock coat back shortens on
top, or from line 9 upward; and for the further reason that the sack
coat back is the wider, the height of a sack back appears still shorter,
as seen in Dia. III and VIII, and is 13½. For further explanation as to
why the back of a sack is shorter than that of a frock, see article on
“Narrow and Broad Backs.”
All foreparts in Dia. I, II and III are in the same position, and all
changes are made on the sidepieces and backs. Dia. III produces
the closer-fitting skirt for a cut-a-way. All skirts are alike over the
back, because all coats must fit the same over that portion of the
body, but fronts of cut-a-ways must be closer than those of double-
breasted straight coats. The lap of the top of the front of the skirt and
bottom of the front of the forepart are reduced from the sidepiece
forward, which takes away all surplus flow of the skirt. The gore in
the fore-part is simply turned forward on a cut-a-way, while on a
“Prince Albert” it stops at the waist seam.
The swing of the sidepiece in Dia. III is made at line 9 over the
forepart and on the square of 20½. The break is made there, and the
calculation is made from that point; and it is for this reason that an
opening is made above line 9, which is about ⅜ at the height of the
sack coat side seam, and is cut away on a frock coat, as a small
gore, if the garment is cut in this position. But in a three-seamed
sack coat the swing must be considered further back, or at the seam,
consequently the opening is at the top of the sack coat side seam,
which is cut out as a small gore between back and front and above
line 11¼, or else the back armhole will be too wide, and show too
much sleeve there. This gore may be made ¼ to ⅜ of a number, but
which is obliterated when the sidepiece is turned so as to come in
the position as shown in Dia. VIII-a.
After the cut for Dia. III had been made, I came to the conclusion
that the opening of the frock coat sidepiece and forepart toward the
armhole, could just as well be balanced in a sack, by cutting it as a
five-seamer, and by making back and forepart even above line 11¼,
and this was one reason why Dia. VIII B was added.
Dia. III
DIA. IV.
Dia. IV represents a vest, and is quite plain. It is on a square of 20,
and in the same position as shown in Dia. I, front and back bases
running parallel. From the front of the waist, or at the pit of the
stomach, or where the body turns, the square of 20 is reduced to
conform to the bend of the body, and from the back of the waist, or
where the body turns, the back receiving what the front has lost.
Under the arm the normal form requires a reduction at the waist of
about 1 in., and another in the middle of the back, as shown in Dia. I,
between the sidepiece and back, but which may partly be taken off
at the side seam and partly buckled up. A vest without buckle-straps
should be cut with a gore in the back of say ½ inch, and as shown by
dots in Dia. IV and XIII. All vests should be cut as though there were
to be no turn-down collar, and if such a collar is to be added, a
simple piece of the shape of the whole neck is attached, in which
shape the front may be curved at pleasure.
The side of the neck as 4, is for a vest without a turn-down collar,
and is calculated to lose one seam for the turn-in; and if the vest be
bound this point ought to be 4¼, and if a turn-down collar is put on,
said point should be fully 4¼, because nothing is lost by a seam, but
instead there is an actual gain by the top-collar covering the seam,
and for the purpose of illustrating Dia. V, VI, IX, Dia. IV has the
shoulder seam cut on a straight line, and without lap or gore, and if
cut just like it, the side of the neck must be stretched say about ¼ to
⅜ inches on each side, and close to the shoulder seam. If, however,
the vestmaker can not be trusted to do the stretching right, it is better
to allow about ¼ spring at the neck, starting at, or about the middle
of the shoulder seam, or to cut the vest as directed at the end of the
article on vests. In no case must the back be held full on the collar.
When finishing the neck, the side of the back is to be turned in, or
cut off, whatever surplus length may be there, but the center of the
back is turned in just one seam. Notch the shoulder seam as shown
and baste up and down.
Dia. IIII.
DIA. V.
This diagram is also given for illustration only. It represents the
centers of the front and back on straight lines, the neck-hole on the
back and front, even, and the reduction of the shoulders at 45 deg.,
as it actually is to be reduced. The side of the neck represents Dia.
IV as cut out 4¾, and would require a standing collar of ¾ to be
sewed on. In this position a neck-band could not be cut on the
forepart as shown in Dia. IV, because the shoulder seam would be
too far in front. Though it is useless for actual cutting, it is worth its
place in this work for illustration. It fully demonstrates that the so-
called front shoulder point is a myth.
Dia. 5.
DIA. VI.
Dia. VI is also for illustration, and shows the vest on the angle of
135 deg., and again on an angle of ½ of 135 deg., or on 67½ deg.
There the angle of 135 deg. is cut in two, or folded together, so that
the center of the front and center of the back are one line, and
wherever the front of the waist is reduced the back is enlarged.
The cut of the side of the neck is the same as shown in Dia. V,
though one is shown as 3 2-4 and the other as 4⅜, but the
calculations are made from different points. Dia. IV is the parent
pattern of Dia. V and VI.
Dia. 6.
DIA. VII.
This diagram represents the sleeve system. On the top square line
from the front base, or at 45 deg. from the back, the sleeve and the
shoulder should lap about 2, or as much as possible to form a nice
curve toward the front seam. A short top sleeve on the angles of 45
and 60 deg. will draw both the front and the back seams out of
shape. A top sleeve is better too long at these points than too short,
because the top sleeve can easily be reduced, but if that lap is too
short, the back and the front seams will be drawn upward, and will
be too long at the armhole, while at the hand the sleeve is that much
too short. Whenever the under sleeve appears too long on either
seam, it shows that the top sleeve is too short. At 60 deg. the
diagram shows 2¼, which may be taken as the smallest portion to
be given there, and may be made 2½. (See Dia. II.) The armhole
and sleeve should lap 1 to 2 seams on the front sleeve base, and if
the armhole is cut larger than the diagram, the sleeve must follow,
which, of course, must change the lap at 60 deg.
The armhole, as it is shown in Dia. VII, is for a close-fitting
armhole, but there is no law to prevent it from being cut further
forward and downward, providing the sleeve follows. (See
description of sleeve as shown in Dia. X.)
Note: Dia. II, II A and VIII B were made one year later and show
the top connections of sleeve and armhole in a different way, and
they also show the armhole larger all around. Stooping forms with
prominent shoulder blades require their armholes still further
forward, but I have never found a stooping form who required his
armholes more than ⅝ in front of 45 deg., and such forms should
have the back that much wider. The armhole ⅜ back of 45 deg. for
the arms thrown back and ⅝ in front of 45 deg. for the arms thrown
forward may be considered the limit for both extremes.
Dia. 7.
DIA. VIII.
Is a sack with three seams and with a straight front. As long as a
cutter is able to cut a straight front, he will have little trouble to cut
any shape of a cutaway for either sack or frock. As shown in the
diagram, the height of the back above line 9 over the front is placed
at 13½, the same as in Dia. III. This height of back will make the
back plenty short for the normal form, and it may be called rather
short, but any coat back is better ¼ inch too short than ¼ inch too
long, for if short, it can easily be stretched at the center and over the
shoulder blade, and such stretching, if done properly, will improve all
such sack coats, because the center of the back as far over to the
shoulder blade of any person are always longer than the sides.
On a frock coat, the shortness at the sides is reduced by a small
gore between the top of sidepiece and the back, because of the
curved seam, but on the more straight sack seam, said reduction
can not so well be made, except by cutting the back shorter, and
stretching it again behind, at, and as far over as the shoulder blade.
For a double-breasted front, add 1 inch to the front of Dia. VIII—
cut a gore under the lapel, and add to the top and front of the lapel,
whatever that gore takes up. Set the buttons back accordingly.
Dia. VIII is made for the same form as is Dia. II, that is for a
slender form and small waist, and if the waist is to be more full, or
the armholes are to be quite loose for working coats, reduce the gore
between the fore part and back one half inch clear down, starting at
line 11¼. The armhole is represented close-fitting, requiring it to be
well stretched, but it may be cut forward to the base and in every
respect made like Dia. II. The same may be done to Dia. VIIIa.
Dia. VIII.
DIA. VIIIa.
This diagram is made especially for the erect form, but may be
used for the normal form by placing the depth of back at 12¾ above
line 9. As the diagram is, it simply gives the result of the closing of
the ⅝ fold, as shown across the waist in Dia. VIII. Erect forms
usually require small coats in the back, and in the armhole, and for
this reason, such forms should be cut one size smaller than the
measure, and ½ inch should be allowed in front, to balance the size.
The front is given with a pretty large roll and the upper part may be
used for a double-breasted sack, while meeting the front edge and
the front angle in front of line 15 and by going forward 4 numbers at
line 30. The gore between the back and sidepiece may be reduced
to 2 at line 20 and to 1½ at line 30. The height of the back, above
line 9 is 1¼ number shorter than on Dia. VIII, and which is accounted
for as follows: The fold across the waist which is obtained from
above is ⅝, and the side of the sidepiece is stretched upward ⅝ on
the forepart, all of which requires the back to be 1¼ shorter above
line 9. If the sidepiece is stretched less, the back must be so much
longer, and for a good many forms ⅜ stretch may be plenty, in which
case the height of back is to be 12½.
Dia. VIIIa.
DIA. IX.
Dia. IX is made to illustrate the changes of the shoulders from the
normal to the long or short neck. For this purpose the shoulders on
each back and front are made equally high, and the coat armhole
connected evenly all around. This diagram being on the square of
17½ would require a coat to lap 2 seams somewhere. The diagram
itself shows a vest on the angle of 15 deg. and in a square of 17½,
with a gore under the arm of 3¼. But the main object of Dia. IX is to
illustrate the height of the shoulders; and extra length or extra
shortness of the shoulder must be produced as shown by dots, and
is further explained in the articles on “Long Necks” and “Square
Shoulders.”
This diagram also shows a shoulder slope of 30 deg., for the
reason that the base is on the front plumb line and not on the center
of the front. The front plumb line is 15 deg. back of the center, hence
from it each front and back shoulder slope is 7½ deg. out of its
normal position. If the diagram were made on the square of 20, the
armhole could not be connected all around, as it must be on the
body. This diagram represents a complete armhole, after the under
arm seam is sewed, and the coat is built around it.

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Behavioral Finance and Asset Prices:

The Influence of Investor's Emotions

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2023 CFA Program Curriculum Level III Volumes 1

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Asset Pricing Real Estate and Public Finance over the

Fredj Jawadi Philippe Rozin

ISSN 2730-6038 ISSN 2730-6046 (electronic)

A broader approach of the optimization problem has multiple consequences. The

University of Strasbourg, Patrick Roger

On February 2, 2021, we organized a one-day meeting on the topic “Investor’s

therefore on the financial market has long been considered accidental.

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David Bourghelle is Associate Professor of Finance at IAE Lille University School

Apostolos Serletis and Libo Xu

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2 The Panel Structural VAR Model

We estimate the bivariate structural GARCH-in-Mean panel VAR model, consisting

4.1 The G7 Countries

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4.2 The BRICS Countries

Fig. 4 Impulse responses for Italy

Fig. 5 Impulse responses for Japan

Fig. 6 Impulse responses for the UK

Fig. 7 Impulse responses for the United States

Table 1 Maximum likelihood estimates of .ψ

France .−1.596 .(0.000)

Italy .−17.339 .(0.000)

United Kingdom .−0.380 .(0.000)

United States .−0.895 .(0.000)

Russia .−3.388 .(0.001)

China .−0.929 .(0.000)

Fig. 8 Impulse responses for Brazil

Fig. 9 Impulse responses for Russia

Fig. 10 Impulse responses for India

Fig. 11 Impulse responses for China

Fig. 12 Impulse responses for South Africa

Rangan Gupta and Christian Pierdzioch

Abstract Using the Heterogeneous Autoregressive Realized Volatility (HAR-RV)

Keywords Climate risks · Realized volatility · Agricultural commodities ·

JEL Classification: C22, C53, Q02

Agricultural commodities have experienced enormous price swings since 2008,

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 23

transition climate risks. Note that we concentrate on an analysis based on a rolling-

We obtained the data on the realized volatility of returns of the 15 agricultural

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