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Stochastic cost flow system for stock markets with an application in behavioral finance

Author

Listed:
  • Oliver Chan

    (Global Equity Derivatives, UBS, Hong Kong)

  • Alfred Ka Chun Ma

    (CASH Algo Finance Group Limited, Hong Kong)

Abstract

We introduce a new stochastic cost flow system for stock markets in which the probability distribution of the weighted average purchase price of a stock among all of its shareholders can be explicitly determined. The stochastic system is illustrated in three empirical applications. Through the empirical results, we demonstrate the impact of choosing cost flow assumptions on the reference purchase price estimates, we show the value of high-frequency financial data, and we advocate the need for the stochastic cost flow system when estimating the proportion of gains realized (PGR) and the proportion of losses realized (PLR) which are the most important measures for the disposition effect.

Suggested Citation

  • Oliver Chan & Alfred Ka Chun Ma, 2016. "Stochastic cost flow system for stock markets with an application in behavioral finance," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1-32, December.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:04:n:s2424786316500262
    DOI: 10.1142/S2424786316500262
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    References listed on IDEAS

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