Contributions published at Financial Economics (Thorsten Hens)

In ihrem 1992 erschienenen Aufsatz «The Cross Section of Expected Stock Returns» machten Eugene Fama und Kenneth French eine neue Investitionsmethode, das Factor Investing, allgemein bekannt. 25 Jahre später hat die Asset-Management-Industrie die Methode als ihren Standard angenommen. Dieser Artikel erklärt, was Factor Investing ist und wie es zurzeit weiterentwickelt wird.

I use a unique dataset from an international Swiss private bank comprising transac-tions, portfolios, and risk profiles to test the influence of the clients and their advisors’ risk characteristics on home bias, disposition effect, and trade frequency. I show that the disposition effect level is connected to a higher degree of investor loss aversion whereas the home bias is widely independent of risk preferences. Trade activity may however reduce both biases while risk aversion diminishes trade frequency. Addi-tionally, my findings propose that the interaction between clients and their advisors helps to reduce biases if both exhibit opposed risk preferences.

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This study provides new insights on how investors form beliefs about future asset prices and how they use these beliefs for their trading decisions. Compared to the objective Bayesian benchmark, investors become overly optimistic when they face a paper loss. In addition, selling decisions are less sensitive to beliefs than purchase decisions. This difference is driven by selling behavior in the presence of paper losses. Our insights stem from a laboratory experiment in which participants are price-takers and trade a stock governed by a persistent two-state Markov chain. At each point in time, we elicit incentivized beliefs about the probability that the stock price will increase in the next period.

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This thesis examines the effect of currency hedging in the context of an internationally diversified equity investor based in Switzerland. In the first part of the thesis, it is outlined why it is advisable for Swiss investors to internationally diversify the equity portfolio despite the persistent appreciation of the Swiss Franc and the historically high hedging costs. Thereafter, an overview of the theoretical determinants of the hedging decision is presented. In contrast to previous studies, we quantify the impact of currency hedging by calculating a world equity index hedged to Swiss Francs. Over the observation period of 2002 – 2016, the unhedged world index measured in local currency is found to outperform the hedged world index, which in turn dominated the unhedged world index measured in Swiss Francs. Moreover, the analysis unveils substantial spikes in the hedge impact during times of market turmoil.

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This thesis analyzes the implied volatility and realized volatility characteristics and their comparable dynamic in combination with trading strategies involving variance swaps. The basics on valuation and construction of variance swaps follow the framework provided by Demeterfi et al. (1999). Different approaches are taken to evaluate whether variance swaps are better used to hedge a portfolio of underlying equities or better used for diversification of yield-generation in an equity portfolio. Firstly, the variance swaps returns using 1-month maturities are computed and analyzed using pure vega returns in order to conclude whether variance swaps can serve as an effective hedge or whether they provide excess returns to make up for the large drawdown potential. Following the conclusion on isolated strategy results the strategy is examined in a portfolio context. The author finds that variance swaps, while providing a decent hedge for large, past pace drawdowns, are too expensive due to convexity premia. The best returns (on a risk adjusted basis), consistent across equity indices, are provided by selling variance swaps with a fixed notional and earning the “insurance”-premium. The introduction of a conditional short-long strategy only enhances returns and portfolio stability in the case of the S&P500 equity index as an underlying. The short variance strategy seems to provide the best diversified returns of all strategies in the portfolio context examined with the drawdown of pro-cyclicality leading to exacerbated portfolio drawdowns and thereby implying that this strategy needs high risk tolerance.

The Carry Trade Strategy is well documented in the finance literature and was highly profitable over the last decades. Since the financial crisis in 2007/2008, the returns diminished and the strategy underperformed many other strategies. In order to improve the performance and risk measurements, additional currency signals are developed such as Value and Momentum. The value signal potentially avoids investing in highly overvalued currencies, which tend to depreciate in the future and the momentum signal avoids investing into highly depreciating currency which depreciate even further. Combining the three pillars of profitable currency investing leads to a strategy, which better performs and has better risk figures. The newly developed strategy is in contrast to the standard Carry Trade Strategy independent from the S&P 500, which implies a large value added when including into an equity portfolio.

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We conduct a standardized survey on risk preferences in 53 countries worldwide and estimate cumulative prospect theory parameters from the data. The parameter estimates show that significant differences on the cross-country level are to some extent robust and related to economic and cultural differences. In particular, a closer look on probability weighting underlines gender differences, economic effects, and cultural impact on probability weighting. The data set is a useful starting point for future research that investigates the impact of risk preferences on the market level.