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17. Dezember 2021, 15:05 |
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Ambiguity about volatility and stock market participation (with C. Uhr) |
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We investigate individual investors' stock market participation decisions under ambiguity about volatility (VVIX) using a setting of plausibly exogenous forced mutual fund liquidations. Individuals choose not to participate in the stock market when ambiguity is high. They reinvest 68% less out of forced liquidation when the sale occurs on a day of high ambiguity than a day with low ambiguity. It is 8% more likely that individuals exit the stock market at all when ambiguity is high. Our results are not driven by rebalancing decisions and are robust to alternative measures of ambiguity about volatility.
Working Paper |
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10. Juni 2021, 14:43 |
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Ambiguity about volatility and investor behavior (with C. Uhr and D. Kostopoulos), Journal of Financial Economics - accepted |
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We relate time-varying aggregate ambiguity about volatility (V-VSTOXX) to individual investor trading. We use the trading records of more than 100,000 individual investors from a large German online brokerage from March 2010 to December 2015. We find that an increase in ambiguity is associated with increased investor activity. It also leads to a reduction in risktaking which does not reverse over the following days. When ambiguity is high, the effect of sentiment looms larger. Survey evidence reveals that ambiguity averse investors are more prone to ambiguity shocks. These results replicate when using the dispersion of professional forecasters as long-term measure of ambiguity and are robust when controlling for alternative newspaper- or market-based ambiguity measures.
Working Paper on SSRN |
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18. November 2019, 22:03 |
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The Consumption Effects of the Disposition to Sell Winners and Hold on to Losers (with B. Loos and M. Pagel) |
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Using a large sample of transaction-level data on all security trades and holdings as well as all spending and income from an online retail bank, we study the effects of a fictitious sale initiated by the bank that changed the displayed purchase prices of all mutual funds in individuals' portfolios. We find that individuals are more likely to sell fictitious winners, i.e., funds that are displayed as winners under the new purchase price, but are losers under the actual purchase price. Beyond affecting individual's disposition to sell winners and hold on to losers, we also document that individual consumption increases in response to realizing fictitious capital gains. To the best of our knowledge, this is the first study documenting a causal link between purchase prices and trades using observational data and finding that the disposition to sell winning investments has real effects in terms of affecting individual consumption. That said, as we show, the consumption response may be brought about by investors being confused about what their actual capital gains are. Thus, our finding that the subjective feeling of investment success and fictitiously changed capital gains affect consumption is informative for the marginal propensity to consume out of stock market wealth.
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06. Oktober 2018, 00:49 |
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Measurement Error in Imputed Consumption (with L. Kueng, S. Baker and M. Pagel), Accepted by the Review of Financial Studies |
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Because of limitations in survey-based measures of household consumption, a growing literature uses an alternative measure of consumption commonly referred to as `imputed consumption'. This approach utilizes annual snapshots of household income and wealth from administrative tax registries to calculate household consumption as the residual of the household budget constraint. In this paper we use transaction-level retail investment data to assess the measurement error that can result in imputed consumption due to intra-year changes in asset values and composition. We show that substantial discrepancies between imputed and actual spending can arise due to trading costs, asset distributions, variable trade timing, and volatile asset prices between two annual snapshots. While these errors tend to be quantitatively small and centered around zero on average, we demonstrate that they vary across individuals of different types and income levels and are highly correlated with the business cycle.
Paper Download |
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06. Oktober 2018, 00:47 |
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Fully Closed: Individual Responses to Realized Capital Gains and Losses (with M. Pagel) Journal of Finance (forthcoming) |
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We use transaction-level data for portfolio holdings and trades as well as account balances, income, and spending of a large sample of retail investors to explore how individuals respond to paper versus realized capital gains and losses. To identify the effects of realized gains and losses, we exploit plausibly exogenous mutual fund liquidations. Specifically, we estimate the marginal propensity to reinvest out of one dollar received from a forced sale event when the investor either achieved a capital gain or a loss relative to his or her initial investment. Theoretically, if individuals held optimized portfolios, the marginal propensity to reinvest out of forced liquidations should be 100% independent of realizing a gain or a loss. Individuals should just reinvest all of their liquidity immediately into a fund with similar characteristics. Empirically, individuals keep a share of their newly found liquidity in cash, save it, consume it, or reinvest it into different funds, stocks, or bonds. Moreover, individuals reinvest 89% if the forced sale resulted in a capital gain, but only 46% in the event of a loss. Such differential treatment of gains and losses is inconsistent with active rebalancing or tax considerations but consistent with mental accounting and the idea that individuals treat realized losses differently from paper losses.
Paper Download |
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06. Oktober 2018, 00:46 |
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The Consumption Response to Capital Gains: Evidence from Mutual Fund Liquidations (with M. Pagel and A. Previtero) |
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Using a large sample of transaction-level data on all asset holdings, spending, and income from a German retail bank, this paper explores how individual consumption responds to realized capital gains. Our identification strategy exploits mutual fund closures, which are arguably exogenous to individual characteristics. We estimate the marginal propensity to consume (MPC) out of one dollar received from a forced sale event and find that it is approximately 30%. We explore how the MPC varies in age and income as well as over the business cycle and across interest rate regimes. We find a higher MPC for low-income investors, which appears consistent with standard life-cycle portfolio-choice models, though we do not find any differences in the MPC for young versus old investors. We also find that the MPC to be lower in recessions and decreasing in interest rates, which is surprising from a standard model perspective.
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06. Oktober 2018, 00:45 |
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Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation, (with C. Leuz, M. Muhn, E. Soltes and A. Hackethal) |
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Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. Our analysis offers insights into the challenges associated with designing effective investor protection against market manipulation.
Paper Download Media Coverage: Manager Magazin |
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06. Oktober 2018, 00:43 |
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Fresh Air Eases Work – The Effect of Air Quality on Individual Investor Activity, (with M. Pagel), R&R requested by the Review of Finance |
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This paper shows that air quality has a significantly negative effect on the willingness of individual investors to sit down, log in, and trade in their brokerage accounts controlling for investor-, weather-, traffic-, and market-specific factors. In perspective, a one standard deviation increase in fine particulate matter leads to the same reduction in the probability of logging in and trading as a one standard deviation increase in sunshine. We document this effect for low levels of pollution that are commonly found throughout the developed world. When individual investor trading is seen as engagement in a cognitively-demanding task similar to office work, our findings suggest that the negative effects of pollution on white-collar productivity may be much more severe than previously thought. To our knowledge, this is the first study to demonstrate a negative impact of pollution on a measure of white-collar work productivity at the individual level in western countries rather than historically polluted places.
Paper Download Media Coverage: Washington Post Morning Call |
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06. Oktober 2018, 00:39 |
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Google Search Volume and Individual Investor Trading, (with D. Kostopoulos and C. Uhr), forthcoming in the Journal of Financial Markets |
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We relate Google search volumes, proxying for negative economic expectations or concerns of households (FEARS), to individual investor trading to deepen the understanding of how, when and who is affected by sentiment. The trading data comes from a large German discount brokerage covering more than 100’000 investors over ten years. We find FEARS to significantly affect individual investor trading, particularly during low sentiment periods. When expectations are bad, investors trade more and rather sell securities. In the long run, trading on FEARS drives investors out of security markets. We find the effects to be particularly pronounced for less sophisticated investors.
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06. Oktober 2018, 00:37 |
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Client Involvement in Expert Advice - Antibiotics in Finance?, (with A. Hackethal, C. Laudenbach and A. Weber) |
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We use minutes from 17,000 financial advisory sessions and corresponding client portfolio data to study how active client involvement affects advisor recommendations and portfolio outcomes. We find that advisors confronted with acquiescent clients stick to their standards and recommend expensive but well diversified mutual fund portfolios. However, if clients take an active role in the meetings, advisors deviate markedly from their standards, resulting in poorer portfolio diversification and lower Sharpe ratios. Our findings that advisors cater to client requests parallel the phenomenon of doctors prescribing antibiotics to insistent patients even if inappropriate, and imply that pandering diminishes the quality of advice.
Paper Download |
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© Steffen Meyer