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The effect of time-induced stress on financial decision making in real markets: The case of traffic congestion

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  • Gelman, Sergey
  • Kliger, Doron

Abstract

We study the role of stress induced by time constraints on investor decision making in real financial markets. We use unexpected traffic congestion as a stress trigger. Our dependent variable is the slope of the implied volatility function (IVF) of options on Russian Trading System Index (RTSI) futures at the left-hand side of the volatility smile (cf. Bollen and Whaley, 2004). Controlling for relevant factors, we find that this slope at the opening of the main trading session is higher subsequent to morning traffic jams, suggesting that investors under stress assign higher weights to extreme loss scenarios. This effect is economically exploitable before transaction costs.

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  • Gelman, Sergey & Kliger, Doron, 2021. "The effect of time-induced stress on financial decision making in real markets: The case of traffic congestion," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 814-841.
    • Handle: RePEc:eee:jeborg:v:185:y:2021:i:c:p:814-841
    DOI: 10.1016/j.jebo.2020.10.022
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    More about this item

    Keywords

    Behavioral finance; GIS; Implied volatility function; Weighting of extreme scenarios;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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