Template-type: ReDIF-Paper 1.0
Author-Name: Peiran Jiao
Author-Workplace-Name: Department of Economics, University of Oxford
Author-Email: peiran.jiao@economics.ox.ac.uk.
Author-Name: Heinrich H. Nax
Author-Workplace-Name: Computational Social Sciences, ETH Zürich
Author-Email:  hnax@ethz.ch.
Title: When is Market the Benchmark? Reinforcement Evidence from Repurchase Decisions
Abstract: Reinforcement relative to an adaptive benchmark is a well-established model of behavior
outside finance. Recently, reinforcement has been identified as an important
driver of decisions to repurchase a stock. In this paper, we enrich the existing reinforcement
model of repurchasing by an aspiration-based market benchmark. When
choosing which stock to repurchase, investors’ sources of reinforcement are weighted
averages of absolute returns from previous sales and relative returns with respect to a
market benchmark. The weights change according to market environments. We empirically
identify the following crucial asymmetry that cannot be reconciled by simple
reinforcement strategy, but is consistent with the model we propose: investors place
more weight on relative returns when the market is performing well, and place more
weight on absolute returns when the market is performing badly
Classification-JEL: G02, G11, D01
Keywords: Reinforcement, Stock Repurchasing, Aspiration Adjustment

Length: 23 pages
Creation-Date: 2016-06-22
Number: 2016-W01
File-URL: https://www.nuffield.ox.ac.uk/economics/papers/2016/JiaoandNax.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1601