Betriebswirtschaftliches Rechnungs und Prüfungswesen

Three essays on behavioural finance


The fact that human economic behaviour has a significant irrational element - one that is simultaneously hard-to-explain and highly predictable - has fascinated economists for decades from Fechner, 1860 to Shiller, 2005 and beyond. In this dissertation, I investigate the field from various perspectives: chapter 1 examines the impact that language describing irrational behaviour in the media has on stock markets; chapter 2 looks at whether musical harmonics can predict what choices participants in money-sharing games will make; and chapter 3 takes an existing theroetical model of stochastic decision-making and changes it to help explain phenomena such as the overweighting of small probabilities, the 'willingness-to-accept'-'willingess-to-pay' (WTA-WTP) disparity, and preference reversals.

A diagnostic criterion for approximate factor structure


We build a simple diagnostic criterion for approximate factor structure in large cross-sectional equity datasets. Given a model for asset returns with observable factors, the criterion checks whether the error terms are weakly cross-sectionally correlated or share at least one unobservable common factor. It only requires computing the largest eigenvalue of the empirical cross-sectional covariance matrix of the residuals of a large unbalanced panel. A general version of this criterion allows us to determine the number of omitted common factors. The panel data model accommodates both time-invariant and time-varying factor structures. The theory applies to random coefficient panel models with interactive fixed effects under large cross-section and time-series dimensions. The empirical analysis runs on monthly and quarterly returns for about ten thousand US stocks from January 1968 to December 2011 for several time-invariant and time-varying specifications. For monthly returns, we can choose either among time-invariant specifications with at least four financial factors, or a scaled three-factor time-varying specification. For quarterly returns, we cannot select macroeconomic models without the market factor.

Preferences for Truthfulness: Heterogeneity among and within Individuals


We conduct an experiment assessing the extent to which people trade off the economic costs of truthfulness against the intrinsic costs of lying. The results allow us to reject a type-based model. People's preferences for truthfulness do not identify them as only either "economic types" (who care only about consequences) or "ethical types" (who care only about process). Instead, we find that preferences for truthfulness are heterogeneous among individuals. Moreover, when examining possible sources of intrinsic costs of lying and their interplay with economic costs of truthfulness, we find that preferences for truthfulness are also heterogeneous within individuals.

Commonality in liquidity and real estate securities


We conduct an empirical investigation of the exposure of U.S. REIT returns to commonality in liquidity. Taking advantage of the specific characteristics of REITs, we study three types of commonality in liquidity: within-asset commonality, cross-asset commonality (with the stock market), and commonality with the underlying property market. We find evidence that the three types of commonality in liquidity represent significant risk factors for REIT returns but only during bad market conditions. We also find that using a linear approach, rather than a conditional, would have underestimated the role of commonality in liquidity risk. This could explain (at least partly) the small impact of commonality on asset prices documented in the extant literature. We also analyze the economic sources of commonality in liquidity and find that demand-side factors prevail over supply-side factors.

Liquidity Risk, Return Predictability, and Hedge Funds' Performance: An Empirical Study


This article analyzes the effect of liquidity risk on the performance of equity hedge fund portfolios. Similarly to Avramov, Kosowski, Naik, and Teo (2007),(2011), we observe that, before accounting for the effect of liquidity risk, hedge fund portfolios that incor- porate predictability in managerial skills generate superior performance. This outperfor-mance disappears or weakens substantially for most emerging markets, event-driven, and long/short hedge fund portfolios once we account for liquidity risk. Moreover, we show that the equity market-neutral and long/short hedge fund portfolios' “alphas” also entail rents for their service as liquidity providers. These results hold under various robustness tests.

Debt enforcement, investment, and risk taking across countries


We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms' investment and risk depends on the firm-specific probability of default. A difference-in-differences analysis of firms' investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.

Asset allocation and monetary policy: evidence from the eurozone


The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by real short-term interest rates varied substantially across countries in the period 2003–2010. We use this cross-country variation in the (local)tightness of monetary policy to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market,causing significant equity price inflation in countries where investment home bias is the strongest

Comments on: Nonparametric Tail Risk, Stock Returns and the Macroeconomy

Incomplete information, heterogeneity, and asset pricing

An empirical investigation in credit spread indices


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