Contributions published at Financial Economics (Thorsten Hens)

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Die Arbeit untersucht, ob Reputationsrisiken einen Einfluss auf die Fondsperformance haben. Es wurden 147 Flagshipfonds, 60 Fonds von kleinen Emittenten und 21 andere empfohlene Fonds auf ihre Performance untersucht. Vergleichsbasis waren 14 verschiede Indizes. Es stellt sich heraus, dass insbesondere die Flagshipfonds ein besseres Risiko Rendite Verhältnis aufweisen, als das durchschnittliche Fondsuniversum. Die anderen Empfehlungen schliessen im Durchschnitt weniger gut ab als die Flagships. Die Fonds der kleinen Emittenten konnten sich gegenüber den Vergleichsindizes nicht absetzen. So konnte gezeigt werden, dass Reputationsrisiken durchaus einen positiven Einfluss auf die Fondsperformance der Vergangenheit haben.

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In many countries structured investment products are popular among retail investors.Weexplain the demand for these products using unique field data where we let subjects freely design their “favorite” structured product. Results suggest that the supply with capital protected products (guarantee certificates) might indeed be demand-driven. This does not seem to be the case for other product categories where marketing and sales practices might play a more important role. In a surveyamong financial practitioners we find furthermore that a demand for capital protected products can be explained by loss aversion and saving motifs, e.g. for buying a house.

Markowitz and Sharpe won the Nobel Prize in Economics for the development of Mean-Variance (M-V) analysis and the Capital Asset Pricing Model (CAPM). Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. In deriving the CAPM, Sharpe, Lintner and Mossin assume expected utility (EU) maximisation in the face of risk aversion. Kahneman and Tversky suggest Prospect Theory (PT) as an alternative paradigm to EU theory. They show that investors distort probabilities, make decisions based on change of wealth, exhibit loss aversion and maximise the expectation of an S-shaped value function, which contains a risk-seeking segment. Can these two apparently contradictory paradigms coexist? We show in this paper that although CPT (and PT) is in conflict to EUT, and violates some of the CAPM's underlying assumptions, the Security Market Line Theorem (SMLT) of the CAPM is intact in the CPT framework. Therefore, the CAPM is intact also in CPT framework.

Individuals sort into and out of economic environments based on their preferences and in response to relative prices. We demonstrate the importance of such sorting for the measurement of social preferences, using two laboratory experiments. First, allowing subjects to avoid environments in which sharing is possible significantly reduces sharing. This reveals the existence of a type of individual who shares reluctantly, preferring to avoid the opportunity to share. Second, after subsidizing the sharing environment, the aggregate amount shared increases, but less is shared, on average, by those who enter. Thus, subsidies intended to induce more sharing have weak effects since they attract those who share the least.

Given a firms investment policy, its dividend policy is irrelevant (Miller and Modigliani (1961)). REITs, by law, pay at least 90 % of their corporate income as dividends, so that their dividend policy is given. This is a reversal of the dividend irrelevance theorem through regulatory means. Such a high dividend payment also means lower retained earnings, leaving firms with little free cash flow. Jensen (1986) argues that lower free cash flow results in mitigated agency problems. In this paper, I ask two questions. First, how does an average REIT, given its dividend policy restricted through regulation, respond to its investment opportunities? Second, does an average REIT, with mitigated agency problems, face less severe financing constraints? In response to the first question, I find that an average REITs investment responsiveness (as measured by Tobins q) is higher than that of firms in other industries. In response to the second question, I find that, despite mitigated agency costs, an average REIT faces, in fact, more severe financing constraints (as measured by sensitivity to cash ow) than other firms. Finally, using the natural experiment provided by the 2001 REIT Modernization Act (RMA) that allowed REITs to own taxable REIT subsidiaries (TRS) and reduce their dividend distribution from 95% to 90%, I show that, for a given increase in internal funds, the negative impact arising from increased agency problems dominates the positive impact of the wealth effect, resulting in a lower overall responsiveness of REITs to their investment opportunities.

Conventional time series analysis, focusing exclusively on a time series at a given scale, lacks the ability to explain the nature of the data-generating process. A process equation that successfully explains daily price changes, for example, is unable to characterize the nature of hourly price changes. On the other hand, statistical properties of monthly price changes are often not fully covered by a model based on daily price changes. In this paper, we simultaneously model regimes of volatilities at multiple time scales through wavelet-domain hidden Markov models. We establish an important stylized property of volatility across different time scales. We call this property asymmetric vertical dependence. It is asymmetric in the sense that a low volatility state (regime) at a long time horizon is most likely followed by low volatility states at shorter time horizons. On the other hand, a high volatility state at long time horizons does not necessarily imply a high volatility state at shorter time horizons. Our analysis provides evidence that volatility is a mixture of high and low volatility regimes, resulting in a distribution that is non-Gaussian. This result has important implications regarding the scaling behavior of volatility, and, consequently, the calculation of risk at different time scales.

This paper proposes a novel measure of economic uncertainty based on the frequency of internet searches. The theoretical motivation is offered by findings in economic psychology that agents respond to increased uncertainty by intensifying their information search. The main advantages of using internet searches are broad reach, timeliness and the fact that they reflect actions, rather than words, which however are not directly related to the stock market. The search-based uncertainty measure compares well against a peer group of alternative indicators and is shown to have a significant relationship with aggregate stock returns and volatility.

For loss averse investors, a sequence of risky investments looks less attractive if it is evaluated myopically—an effect called myopic loss aversion (MLA). The consequences of this effect have been confirmed in several experiments and its robustness is largely undisputed. The effect’s causes, however, have not been thoroughly examined with regard to one important aspect. Due to the construction of the lotteries that were used in the experiments, none of the studies is able to distinguish between MLA and an explanation based on (myopic) loss probability aversion (MLPA). This distinction is important, however, in discussion of the practical relevance and the generalizability of the phenomenon. We designed an experiment that is able to disentangle lottery attractiveness and loss probabilities. Our analysis reveals that mere loss probabilities are not as important in this dynamic context as previous findings in other domains suggest. The results favor the MLA over the MLPA explanation.

Prospect Theory is widely regarded as the most promising descriptive model for decision making under uncertainty. Various tests have corroborated the validity of the characteristic fourfold pattern of risk attitudes implied by the combination of probability weighting and value transformation. But is it also safe to assume stable Prospect Theory preferences at the individual level? This is not only an empirical but also a conceptual question. Measuring the stability of preferences in a multi-parameter decision model such as Prospect Theory is far more complex than evaluating single-parameter models such as Expected Utility Theory under the assumption of constant relative risk aversion. There exist considerable interdependencies among parameters such that allegedly diverging parameter combinations could in fact produce very similar preference structures. In this paper, we provide a theoretic framework for measuring the (temporal) stability of Prospect Theory parameters. To illustrate our methodology, we further apply our approach to 86 subjects for whom we elicit Prospect Theory parameters twice, with a time lag of one month. While documenting remarkable stability of parameter estimates at the aggregate level, we find that a third of the subjects show significant instability across sessions.

As early as 1934 Graham and Dodd conjectured that excess returns from value investment originate from a tendency of stock prices to converge towards a fundamental value. This paper confirms their insights within the evolutionary finance model of Evstigneev et al. (Econ Theory 27:449–468, (Evstigneev et al. 2006)). Our empirical results show the predictive power of the evolutionary benchmark valuation for the relative market capitalization and its dynamics in the sample of firms listed in the Dow Jones Industrial Average index in 1981–2009.