Refine
Year of publication
Document Type
- Working Paper (55)
Language
- English (55) (remove)
Has Fulltext
- yes (55)
Is part of the Bibliography
- no (55)
Keywords
- USA (4)
- Venture Capital (4)
- Credit Ratings (3)
- Kreditmarkt (3)
- Sovereign Risk (3)
- machine learning (3)
- Alternative investments (2)
- Asset Pricing (2)
- Blockchain (2)
- Disposition Effect (2)
Institute
- Center for Financial Studies (CFS) (55) (remove)
This paper sets the background for the Special Issue of the Journal of Empirical Finance on the European Sovereign Debt Crisis. It identifies the channel through which risks in the financial industry leaked into the public sector. It discusses the role of the bank rescues in igniting the sovereign debt crisis and reviews approaches to detect early warning signals to anticipate the buildup of crises. It concludes with a discussion of potential implications of sovereign distress for financial markets.
This paper investigates whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman’s (1992) cumulative prospect theory (CPT). We argue that these options are overpriced because investors overweight small probability events and overpay for such positively skewed securities, i.e., characteristics of lottery tickets. We match a set of subjective density functions derived from risk-neutral densities, including CPT with the empirical probability distribution of U.S. equity returns. We find that overweighting of small probabilities embedded in CPT explains on average the richness of out-of-the money single stock calls better than other utility functions. The degree that agents overweight small probability events is, however, strongly timevarying and has a horizon effect, which implies that it is less pronounced in options of longer maturity. We also find that time-variation in overweighting of small probabilities is strongly explained by market sentiment, as in Baker and Wurgler (2006).
Low probability events are overweighted in the pricing of out-of the-money index puts and single stock calls. We find that this behavioral bias is strongly time-varying, linked to equity market sentiment, and higher moments of the risk-neutral density. An implied volatility (IV) sentiment measure that is jointly derived from index and single stock options explains investors' overweight of tail events the best. Our findings also suggest that IV-sentiment predicts equity markets reversals better than overweight of small probabilities itself. When employed in a trading strategy, IV-sentiment delivers economically significant results, which are more consistent than the ones produced by the market sentiment factor. The joint use of information from the single stock and index option markets seems to explain the forecasting power of IV-sentiment. Out-of-sample tests on reversal prediction show that our IV-sentiment measure adds value over and above traditional factors in the equity risk premium literature, especially as an equity-buying signal. This reversals prediction seems to improve time-series and cross-sectional momentum strategies.
We investigate the effect of overreaction in the fine art market. Using a unique sample of auction prices of modern prints, we define an overvalued (undervalued) print as a print that was bought for a price above (below) its high (low) auction pricing estimate. Based on the overreaction hypothesis, we predict that overvalued (undervalued) prints generate a negative (positive) excess return at a subsequent sale. Our empirical findings confirm our expectations. We report that prints that were bought for a price 10 percent above (below) its high (low) pricing estimate generate a positive (negative) excess return of 12 percent (17 percent) after controlling for the general price movement on the prints market. The price correction for overvalued (undervalued) prints is more pronounced during recessions (expansions).
Euro crash risk
(2015)
A premise of the capabilities perspective in strategy is that firm-specific capabilities allow some firms to be unusually adept at exploiting growth opportunities. Since few firms have the capacity to internally generate the quantity or variety of strategic resources needed to exploit growth opportunities, the ability to externally acquire complementary resources is critical to the acquisition of competitive advantage. However, the external sourcing of resources exposes the firm’s strategic resources to risks of expropriation. We argue this threat gives capable firms incentive to use internally generated strategic resources to pursue growth opportunities before turning to external sources. A pecking order theory of strategic resource deployment is implied. Data from a 22-year sample of cross-border investment partnership decisions made by U.S.-based venture capital firms lend support to our theory.
We investigate the effect of the tone of news on investor stock price expectations and beliefs. In an experimental study we ask subjects to estimate a future stock price for twelve real listed companies. As additional information we provide them with historical stock prices and extracts from real newspaper articles. We propose a way to manipulate the tone of news extracts without distorting its content. Subjects in different treatment groups read news items that are written either in positive or negative tone for each stock. We find that subjects tend to predict a significantly higher (lower) return for stocks after reading positive (negative) tone news. The effect is especially pronounced for stocks with poor past performance. Subjects are more likely to be optimistic (pessimistic) about the economy and to buy (sell) stocks after reading positive (negative) than negative (positive) tone news. Our results show that the news media might affect not only how investors perceive information, but also what they do in response to it.
Emotions-at-risk: an experimental investigation into emotions, option prices and risk perception
(2014)
This paper experimentally investigates how emotions are associated with option prices and risk perception. Using a binary lottery, we find evidence that the emotion ‘surprise’ plays a significant role in the negative correlation between lottery returns and estimates of the price of a put option. Our findings shed new light on various existing theories on emotions and affect. We find gratitude, admiration, and joy to be positively associated with risk perception, although the affect heuristic predicts a negative association. In contrast with the predictions of the appraisal tendency framework (ATF), we document a negative correlation between option price and surprise for lottery winners. Finally, the results show that the option price is not associated with risk perception as commonly used in psychology.
This chapter analyzes the risk and return characteristics of investments in artists from the Middle East and Northern Africa (MENA) region over the sample period 2000 to 2012. With hedonic regression modeling we create an annual index that is based on 3,544 paintings created by 663 MENA artists. Our empirical results prove that investing in such a hypothetical index provides strong financial returns. While the results show an exponential growth in sales since 2006, the geometric annual return of the MENA art index is a stable13.9 percent over the whole period. We conclude that investing in MENA paintings would have been profitable but also note that we examined the performance of an emerging art market that has only seen an upward trend without any correction, yet.
The record-breaking prices observed in the art market over the last three years raise the question of whether we are experiencing a speculative bubble. Given the difficulty to determine the fundamental value of artworks, we apply a right-tailed unit root test with forward recursive regressions (SADF test) to detect explosive behaviors directly in the time series of four different art market segments (“Impressionist and Modern”, “Post-war and Contemporary”, “American”, and “Latin American”) for the period from 1970 to 2013. We identify two historical speculative bubbles and find an explosive movement in today’s “Post-war and Contemporary” and “American” fine art market segments.
This paper investigates the impact of news media sentiment on financial market returns and volatility in the long-term. We hypothesize that the way the media formulate and present news to the public produces different perceptions and, thus, incurs different investor behavior. To analyze such framing effects we distinguish between optimistic and pessimistic news frames. We construct a monthly media sentiment indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and/or the lead paragraph. Our results indicate that pessimistic news media sentiment is positively related to global market volatility and negatively related to global market returns 12 to 24 months in advance. We show that our media sentiment indicator reflects very well the financial market crises and pricing bubbles over the past 20 years.
Does it pay to invest in art? A selection-corrected returns perspective : [draft october 15, 2013]
(2013)
This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 6.5 percent, down from 10 percent for traditional uncorrected repeat sales regressions, and Sharpe Ratios drop from 0.24 to 0.04. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.
The 2011 European short sale ban on financial stocks: a cure or a curse? : [version 31 july 2013]
(2013)
Did the August 2011 European short sale bans on financial stocks accomplish their goals? In order to answer this question, we use stock options’ implied volatility skews to proxy for investors’ risk aversion. We find that on ban announcement day, risk aversion levels rose for all stocks but more so for the banned financial stocks. The banned stocks’ volatility skews remained elevated during the ban but dropped for the other unbanned stocks. We show that it is the imposition of the ban itself that led to the increase in risk aversion rather than other causes such as information flow, options trading volumes, or stock specific factors. Substitution effects were minimal, as banned stocks’ put trading volumes and put-call ratios declined during the ban. We argue that although the ban succeeded in curbing further selling pressure on financial stocks by redirecting trading activity towards index options, this result came at the cost of increased risk aversion and some degree of market failure.
This paper investigates the effect of anticipated/experienced regret and pride on individual investors’ decisions to hold or sell a winning or losing investment, in the form of the disposition effect. As expected the results suggest that in the loss domain, low anticipated regret predicts a greater probability of selling a losing investment. While in the gain domain, high anticipated pride indicates a greater probability of selling a winning investment. The effects of high experienced regret/pride on the selling probability are found as well. An unexpected finding is that regret (pride) seems to be not only relevant for the loss (gain) domain, but also for the gain (loss) domain. In addition, this paper presents evidence of interconnectedness between anticipated and experienced emotions. The authors discuss the implications of these findings and possible avenues for further research.
After nearly two decades of US leadership during the 1980s and 1990s, are Europe’s venture capital (VC) markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amid an overall VC performance slump with no encouraging news? We attempt to answer these questions by tracking over 40,000 VC-backed firms stemming from six industries in 13 European countries and the US between 1985 and 2009; determining the type of exit – if any – each particular firm’s investors choose for the venture.
Venture capital (VC) investment has long been conceptualized as a local business , in which the VC’s ability to source, syndicate, fund, monitor, and add value to portfolio firms critically depends on their access to knowledge obtained through their ties to the local (i.e., geographically proximate) network. Consistent with the view that local networks matter, existing research confirms that local and geographically distant portfolio firms are sourced, syndicated, funded, and monitored differently. Curiously, emerging research on VC investment practice within the United States finds that distant investments, as measured by “exits” (either initial public offering or merger & acquisition) out-perform local investments. These findings raise important questions about the assumed benefits of local network membership and proximity. To more deeply probe these questions, we contrast the deal structure of cross-border VC investment with domestic VC investment, and contrast the deal structure of cross-border VC investments that include a local
partner with those that do not. Evidence from 139,892 rounds of venture capital financing in the period 1980-2009 suggests that cross-border investment practice, in terms of deal sourcing, syndication, and performance indeed change with proximity, but that monitoring practices do not. Further, we find that the inclusion of a local partner in the investment syndicate yields surprisingly few benefits. This evidence, we argue, raises important questions about VC investment practice as well as the ability of firms to capture and lever the presumed benefits of network membership.
We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. Keywords: Risk Aversion , Preference Uncertainty , Risk-taking , Asset Allocation JEL Classification: D81, D84, G11 This Version: November 25, 2010
According to disposition effect theory, people hold losing investments too long. However, many investors eventually sell at a loss, and little is known about which psychological factors contribute to these capitulation decisions. This study integrates prospect theory, utility maximization theory, and theory on reference point adaptation to argue that the combination of a negative expectation about an investment’s future performance and a low level of adaptation to previous losses leads to a greater capitulation probability. The test of this hypothesis in a dynamic experimental setting reveals that a larger total loss and longer time spent in a losing position lead to downward adaptations of the reference point. Negative expectations about future investment performance lead to a greater capitulation probability. Consistent with the theoretical framework, empirical evidence supports the relevance of the interaction between adaptation and expectation as a determinant of capitulation decisions. Keywords: Investments , Adaptation , Reference Point , Capitulation , Selling Decisions , Disposition Effect , Financial Markets JEL Classification: D91, D03, D81
We test whether asymmetric preferences for losses versus gains as in Ang, Chen, and Xing (2006) also affect the pricing of cash flow versus discount rate news as in Campbell and Vuolteenaho (2004). We construct a new four-fold beta decomposition, distinguishing cash flow and discount rate betas in up and down markets. Using CRSP data over 1963–2008, we find that the downside cash flow beta and downside discount rate beta carry the largest premia. We subject our result to an extensive number of robustness checks. Overall, downside cash flow risk is priced most consistently across different samples, periods, and return decomposition methods, and is the only component of beta that has significant out-of-sample predictive ability. The downside cash flow risk premium is mainly attributable to small stocks. The risk premium for large stocks appears much more driven by a compensation for symmetric, cash flow related risk. Finally, we multiply our premia estimates by average betas to compute the contribution of the different risk components to realized average returns. We find that up and down discount rate components dominate the contribution to average returns of downside cash flow risk. Keywords: Asset Pricing, Beta, Downside Risk, Upside Risk, Cash Flow Risk, Discount Rate Risk JEL Classification: G11, G12, G14
We show that average excess returns during the last two years of the presidential cycle are significantly higher than during the first two years: 9.8 percent over the period 1948 – 2008. This pattern in returns cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. In this paper, we formally test the presidential election cycle (PEC) hypothesis as the alternative explanation found in the literature for explaining the presidential cycle anomaly. PEC states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions and taxes) to remain in power. We formulate eight empirically testable propositions relating to the fiscal, monetary, tax, unexpected inflation and political implications of the PEC hypothesis. We do not find statistically significant evidence confirming the PEC hypothesis as a plausible explanation for the presidential cycle effect. The existence of the presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians employing their economic influence to remain in power. JEL Classification: E32; G14; P16 Keywords: Political Economy, Market Efficiency, Anomalies, Calendar Effects