Do individual investors have asymmetric information based on work experience

Abstract Using a novel dataset covering all individual investors' stock market transactions in Norway over 10 years, we analyze whether individual investors have a preference for professionally close stocks, and whether they make excess returns on such investments. After excluding own-company stock holdings, investors hold on average 11% of their portfolio in stocks within their two-digit industry of employment. Given the poor hedging properties of professionally close stocks, one would expect such investments to be associated with asymmetric information and abnormally high returns. In contrast, all our estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for why individuals excessively trade in professionally close stocks

Optimal Pension Insurance Design

In this paper we provide a framework for how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers’ welfare. Given that the contracts have to be priced correctly, we use individuals’ preferences to find the preferred design. Assuming CRRA utility, we cannot explain the existence of any form of guarantees. Through numerical solutions we quantify the difference (measured in security equivalents) to the preferred Merton solution of direct investments in a fixed proportion of risky and risk free assets. The largest welfare loss seems to come from the fact that guarantees are effective by the end of each year, not only by the expiry of the contract. However, the demand for products with guarantees may be explained through behavioral models accounting for loss aversion, e.g. cumulative prospect theory. In this case, the optimal design seems to be a simple contract with a life-time guarantee

Utvikling av eierstrukturen på Oslo Børs : en beskrivelse av eierstrukturutviklingen for børsnoterte selskaper i perioden 1994 – 2007

Prosjektets fokus er utviklingen av eierstruktur for og investorene i selskapene notert på Oslo Børs. Eierstrukturen, og hvem aksjonærene er, er knyttet til sentrale utviklingstrekk i børsmarkedet, men er samtidig bare en av mange faktorer som potensielt kan forklare verdiutvikling, avkastning og risiko i perioden. Disse øvrige faktorer faller utenfor dette prosjektets mandat og vi gjør derfor ingen forsøk på å forklare investorenes forvaltningsresultater ved bruk av eierstrukturutviklingen

Intergenerational Effects of Guaranteed Pension Contracts

In this paper we show that there exist an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation

Essays on portfolio choice

The four papers that make up my thesis take different approaches to portfolio choice. The first paper, Expertise Bias, is an empirical paper investigating individuals' portfolio choice. The main finding is that individual investors have an excess weight (according to standard portfolio theory) in stocks related to their expertise. The investigation of this research question is possible due to a unique Norwegian data set that follows all Norwegian citizens. For each individual, the data set contains information that can connect his expertise (e.g. history of employment, experience, education, and wage) with his stock holding (all individual stocks). In addition, the data set includes many socioeconomic and portfolio variables. The next two papers, Optimal Pension Insurance Design and Intergenerational Effects of Guaranteed Pension Contracts, focuson how financial institutions such as life insurance companies, manage individuals' pension savings. Optimal Pension Insurance Design documents that within a standard expected utility framework traditional pension contracts are not part of the optimal portfolio. However, the demand for the pension products may be explained through behavioral models (e.g. Cumulative Prospect Theory). The third paper documents an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts. The subsidy may be large enough to explain why late generations hold guaranteed interest rate products as part of their optimal portfolio allocation. In the last paper I investigate portfolio choice on an even more aggregate level, a country. In Strategic Asset Allocation for a Country, I offer advice on an investment strategy that captures the long-term relationship between the non-tradable assets and liabilities and the financial assets of a country. Instead of using contemporaneous correlation, I apply cointegration and duration matching to identify the long-term relationship between the non-tradable assets and liabilities and the financial assets

Intergenerational Effects of Guaranteed Pension Contracts

In this paper we show that there exist intergenerational cross-subsidization effects in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation.Portfolio Choice; Life and Pension Insurance; Interest Rate Guarantees

Optimal Pension Insurance Design

In this paper we analyze how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers’ welfare. Given that the contracts have to be priced correctly, we use individuals’ preferences to find the preferred design. Assuming CRRA utility, we cannot explain the existence of any form of guarantees. Through numerical solutions we quantify the difference (measured in certainty equivalents) to the preferred Merton solution of direct investments in a fixed proportion of risky and risk free assets. The largest welfare loss seems to come from the fact that guarantees are effective by the end of each year, not only by the expiry of the contract. However, the demand for products with guarantees may be explained through behavioral models. We use cumulative prospect theory as an example, showing that the optimal design is a simple contract with a life-time guarantee and no default option.Household Finance; Portfolio Choice; Life and Pension Insurance; Prospect Theory

Optimal pension insurance design

In this paper we analyze how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers' welfare. Given that the contracts have to be priced correctly, we use individuals' preferences to find the preferred design. Assuming CRRA utility, we cannot explain the existence of any form of guarantees. Through numerical solutions we quantify the difference (measured in certainty equivalents) to the preferred Merton solution of direct investments in a fixed proportion of risky and risk free assets. The largest welfare loss seems to come from the fact that guarantees are effective by the end of each year, not only by the expiry of the contract. However, the demand for products with guarantees may be explained through behavioral models. We use cumulative prospect theory as an example, showing that the optimal design is a simple contract with a life-time guarantee and no default option.

Strategic asset allocation for a country: the Norwegian case

This paper develops a simple strategic asset allocation model for a country with non-tradable assets and liabilities. Contemporaneous correlation does not capture the long-term relationship between the non-tradable items and the financial assets. I apply cointegration and duration matching to better identify the long-term relationship. The model is applied to the case of Norway. Simulations suggest that Norway should implement a strategy which entails a higher proportion (than today’s strategy) invested in stocks. Although the new strategy is superior in several criteria and as Norway reforms its social security system, there is still considerable risk that Norway will fail to meet its liabilities. Copyright Swiss Society for Financial Market Research 2007Strategic asset allocation, Social security system, Public pensions, G11, H55,