564 research outputs found
Do Stock Price Bubbles Influence Corporate Investment?
Building on recent developments in behavioral asset pricing, we develop a model in which dispersion of investor beliefs under short-selling constraints drives a firm's stock price above its fundamental value. Managers optimally respond to the stock market bubble by issuing new equity. The bubble reduces the user-cost of capital and increase real investment. Using the variance of analysts' earnings forecasts as a proxy for the dispersion of investor beliefs, we find strong empirical support for the model's key prediction that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment.
Moral hazard and debt maturity
We present a model of the maturity of a bankâs uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bankâs risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis
Financial advisors: a case of babysitters?
We merge administrative information from a large German discount brokerage firm with regional data to examine if financial advisors improve portfolio performance. Our data track accounts of 32,751 randomly selected individual customers over 66 months and allow direct comparison of performance across self-managed accounts and accounts run by, or in consultation with, independent financial advisors. In contrast to the picture painted by simple descriptive statistics, econometric analysis that corrects for the endogeneity of the choice of having a financial advisor suggests that advisors are associated with lower total and excess account returns, higher portfolio risk and probabilities of losses, and higher trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own. Regression analysis of who uses an IFA suggests that IFAs are matched with richer, older investors rather than with poorer, younger ones
Executing large orders in a microscopic market model
In a recent paper, Alfonsi, Fruth and Schied (AFS) propose a simple order
book based model for the impact of large orders on stock prices. They use this
model to derive optimal strategies for the execution of large orders. We apply
these strategies to an agent-based stochastic order book model that was
recently proposed by Bovier, \v{C}ern\'{y} and Hryniv, but already the
calibration fails. In particular, from our simulations the recovery speed of
the market after a large order is clearly dependent on the order size, whereas
the AFS model assumes a constant speed. For this reason, we propose a
generalization of the AFS model, the GAFS model, that incorporates this
dependency, and prove the optimal investment strategies. As a corollary, we
find that we can derive the ``correct'' constant resilience speed for the AFS
model from the GAFS model such that the optimal strategies of the AFS and the
GAFS model coincide. Finally, we show that the costs of applying the optimal
strategies of the GAFS model to the artificial market environment still differ
significantly from the model predictions, indicating that even the improved
model does not capture all of the relevant details of a real market.Comment: 32 pages, 12 figure
Default, foreclosure, and strategic renegotiation / 1542
Includes bibliographical references (p. 21-24)
Financial Advisors: A Case of Babysitters?
This paper provides a joint analysis of household stockholding participation, stock location among stockholding modes, and participation spillovers, using data from the US Survey of Consumer Finances. Our multivariate choice model matches observed participation rates, conditional and unconditional, and asset location patterns. Financial education and sophistication strongly affect direct stockholding and mutual fund participation, while social interactions affect stockholding through retirement accounts only. Household characteristics influence stockholding through retirement accounts conditional on owning retirement accounts, unlike what happens with stockholding through mutual funds. Although stockholding is more common among retirement account owners, this fact is mainly due to their characteristics that led them to buy retirement accounts in the first place rather than to any informational advantages gained through retirement account ownership itself. Finally, our results suggest that, taking stockholding as given, stock location is not arbitrary but crucially depends on investor characteristics.Financial Advice, Portfolio Choice, Household Finance
Why have asset price properties changed so little in 200 years
We first review empirical evidence that asset prices have had episodes of
large fluctuations and been inefficient for at least 200 years. We briefly
review recent theoretical results as well as the neurological basis of trend
following and finally argue that these asset price properties can be attributed
to two fundamental mechanisms that have not changed for many centuries: an
innate preference for trend following and the collective tendency to exploit as
much as possible detectable price arbitrage, which leads to destabilizing
feedback loops.Comment: 16 pages, 4 figure
How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans
Although extensive choice seems appealing, research shows that it may hinder motivation to buy and decrease subsequent satisfaction with purchased goods. This paper examines whether these findings generalize to employees who are making decisions about whether to invest in 401(k) retirement saving plans. Using data from nearly 800,000 employees, we tested the hypothesis that employee 401(k) participation rates fall as the number of fund options increase. Our results confirm that participation in 401(k) plans is higher in plans offering a handful of funds, as compared to plans offering ten or more options
The Investment Management Game: Extending the Scope of the Notion of Core
The core is a dominant solution concept in economics and cooperative game
theory; it is predominantly used for profit, equivalently cost or utility,
sharing. This paper demonstrates the versatility of this notion by proposing a
completely different use: in a so-called investment management game, which is a
game against nature rather than a cooperative game. This game has only one
agent whose strategy set is all possible ways of distributing her money among
investment firms. The agent wants to pick a strategy such that in each of
exponentially many future scenarios, sufficient money is available in the right
firms so she can buy an optimal investment for that scenario. Such a strategy
constitutes a core imputation under a broad interpretation, though traditional
formal framework, of the core. Our game is defined on perfect graphs, since the
maximum stable set problem can be solved in polynomial time for such graphs. We
completely characterize the core of this game, analogous to Shapley and Shubik
characterization of the core of the assignment game. A key difference is the
following technical novelty: whereas their characterization follows from total
unimodularity, ours follows from total dual integralityComment: 16 pages. arXiv admin note: text overlap with arXiv:2209.0490
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