Publications

Ambiguity and private investors’ behavior after forced fund liquidations (with C. Uhr)

Citation: Journal of Financial Economics, Volume 156 (Full paper)

Fresh air eases work—the effect of air quality on individual investor activity (with M. Pagel)

Citation: Review of Finance, Volume 28, Issue 3, Pages 1105–1149 (Full paper)

This article shows that contemporaneous and lagged air pollution negatively affects the likelihood of German individual investors to log in and trade in their brokerage accounts, using intraday data and controlling for investor-, weather-, traffic-, and market-specific factors. A 1 SD increase in air pollution leads to a 1.3 percent reduction in the probability of logging in, which is larger than the response to a 1 SD increase in sunshine. We argue that changes in air pollution affect productivity in cognitively demanding tasks, such as trading. Our results are robust to macroeconomic productivity shocks, nonlinearities, or measurement error.

Media Coverage:
Washington Post
Morning Call

Ambiguity about volatility and investor behavior (with C. Uhr and D. Kostopoulos)

Citation: Journal of Financial Economics, Volume 145, Issue 1, Pages 277-296 (Full paper)

 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.

Measurement Error in Imputed Consumption (with L. Kueng, S. Baker and M. Pagel)

Citation: The Review of Financial Studies, Volume 35,  Pages 3021–3059 (Download paper)

Many research papers in household finance utilize annual snapshots of household wealth from administrative data, such as tax registries, to calculate “imputed consumption.” However, trading costs, unobserved intrayear trades, or unobserved security characteristics may cause measurement error. We document how such errors vary across groups of individuals by income, portfolio characteristics, and wealth and how they are correlated with individual income and balance sheets, asset prices, and the business cycle using transaction-level retail brokerage account data. We find that the economic significance of imputation error is small in many research settings, and we discuss robustness checks and econometric specifications to minimize the impact of imputation error in future research.

Fully Closed: Individual Responses to Realized Capital Gains and Losses (with M. Pagel) 

Citation: The Journal of Finance, Volume 77,  Pages 1529 - 1589 (Download paper)

We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; but reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months and arises because many individuals forced to realize a loss choose not to reinvest anything and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.

How Does Household Spending Respond to an Epidemic? Consumption during the 2020 COVID-19 Pandemic (with S. Baker, R.A. Farrokhnia, M. Pagel, C. Yannelis)

Citation: The Review of Asset Pricing Studies, Volume 10,  Pages 834–862 (Download paper)

 
In this paper, we disentangle investor sentiment into two components: mood and household attitudes towards the economy. We apply acoustical analysis to the daily top ten of music downloads in iTunes for Germany to derive a novel and direct measure for mood. We match this novel mood index with trading data of German individual investors. We find that when mood is positive, investors purchase more, particularly trading into risky and out of less-risky securities. To proxy for household attitudes towards the economy, we use an already existing index (FEARS), which bases on Google search volumes of negative economic terms. We find that FEARS drives trading in the same fashion as in previous studies and that these effects significantly depend on mood. We conclude that there are two sources of sentiment driving individual investors, which significantly interact.

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.

In this paper, we disentangle investor sentiment into two components: mood and household attitudes towards the economy. We apply acoustical analysis to the daily top ten of music downloads in iTunes for Germany to derive a novel and direct measure for mood. We match this novel mood index with trading data of German individual investors. We find that when mood is positive, investors purchase more, particularly trading into risky and out of less-risky securities. To proxy for household attitudes towards the economy, we use an already existing index (FEARS), which bases on Google search volumes of negative economic terms. We find that FEARS drives trading in the same fashion as in previous studies and that these effects significantly depend on mood. We conclude that there are two sources of sentiment driving individual investors, which significantly interact.

Learning from mistakes (with M. Koestner, B. Loos and A. Hackethal)

Citation: Journal of Business Economics, 2017, Volume 87, pp. 669–703 (Download paper)

Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates into better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is related to learning from overtrading.

Abusing ETFs (with U. Bhattacharya, A. Hackethal, and B. Loos)

Citation: Review of Finance, 2017, Volume 21, pp. 1217-1250 (Download paper)

Using data from a large German brokerage, we find that individuals investing in passive exchange-traded funds (ETFs) do not improve their portfolio performance, even before transaction costs. Further analysis suggests that this is because of poor ETF timing as well as poor ETF selection (relative to the choice of low-cost, well-diversified ETFs). An exploration of investor heterogeneity shows that though investors who trade more have worse ETF timing, no groups of investors benefit by using ETFs, and no groups will lose by investing in low-cost, well-diversified ETFs.

The impact of weather on German retail investors (with J. Schmittmann, J. Pirschel and A. Hackethal)

Citation: Review of Finance, 2015, Vol. 19, pp. 1143-1183 (Download paper)

We explore the impact of weather on trading by individual investors. Over a time span of 94 months, we analyze daily trading records of individual investors. Controlling for various investor- and market-specific factors, we find a two-fold effect of weather. We first observe that investor sentiment, as measured by purchases relative to sales, is significantly higher on days with good weather. In addition, we find that retail investors generally trade more on bad weather days. This result is consistent with the notion that retail investors incur an opportunity cost for spending time trading on days with good weather.

The effect of personal portfolio reporting on private investors (with R. Gerhardt)

Citation: Financial Markets and Portfolio Management, 2013, Volume 27, pp. 257-273. (awarded the best paper of the year award)
(Download paper)

Information search is costly for private households, especially in relation to their wealth. This paper investigates how retail customers react to free portfolio reporting—and thus reduced search costs—in a unique experimental setting. A large German direct bank sends portfolio reports to 10,000 customers while maintaining a control group of equal size and structure that receives no reports. Analyzing demographics as well as detailed portfolio and trade data, we find that gender, wealth, trade frequency, risk tolerance, and diversification drive the interest in portfolio information. Reading a portfolio report also triggers trading actions; thus, investors seem to appreciate the reduced information costs and act on the information. In addition to contributing to the financial literature on households’ information acquisition, this study derives valuable implications for financial institutions regarding communications and services for their customers.

Is unbiased financial advice to retail investors sufficient? Answers from a large field study (with U. Bhattacharya, A. Hackethal, S. Kaesler and B. Loos)

Citation: Review of Financial Studies, 2012, Vol. 25, pp. 975-1032 (Download paper)

Working with one of the largest brokerages in Germany, we record what happens when unbiased investment advice is offered to a random set of approximately 8,000 active retail customers out of the brokerage's several hundred thousand retail customers. We find that investors who most need the financial advice are least likely to obtain it. The investors who do obtain the advice (about 5%), however, hardly follow the advice and do not improve their portfolio efficiency by much. Overall, our results imply that the mere availability of unbiased financial advice is a necessary but not sufficient condition for benefiting retail investors.

Verbraucherschutz durch Leistungstransparenz in der Anlageberatung (with A. Hackethal and K. Langenbucher)

Citation: Zeitschrift für betriebswirtschaftliche Forschung (zfbf), 2010, Vol. 62, pp. 108-121 (Download paper)

Überprüfung des Zusammenhangs zwischen Weiterempfehlungsbereitschaft und Kundenwert (with P. Schmitt and B. Skiera)

Citation: Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung, 2010, Vol. 62, pp. 30-59 (Download paper)

Das in der Praxis weit verbreitete Net Promoter Score (NPS)-Konzept unterstellt, dass ein positiver, nicht-linearer Zusammenhang zwischen der Weiterempfehlungsbereitschaft eines Kunden und dessen Kundenwert besteht. Allerdings wurde diese für das Kundenmanagement zentrale Behauptung noch nicht empirisch überprüft. Die vorliegende Arbeit untersucht daher - anhand eines Datensatzes aus der Finanzdienstleistungsbranche - den Zusammenhang zwischen der Weiterempfehlungsbereitschaft eines Kunden und dessen Kundenwert. Die Ergebnisse zeigen, dass Weiterempfehlungsbereitschaft im vorliegenden Datensatz keinen signifikanten Einfluss auf den Kundenwert hat. Die Weiterempfehlungsbereitschaft erhöht zwar den Deckungsbeitrag, nicht jedoch die Kundenbindung. Die Kennzahl Zufriedenheit hat dagegen einen signifikanten Einfluss auf den Kundenwert. Der erwartete nicht-lineare Zusammenhang zwischen Weiterempfehlungsbereitschaft (beziehungsweise Zufriedenheit) und Kundenwert kann nicht bestätigt werden. Aufgrund der vorliegenden Resultate kann die herausragende Bedeutung des NPS-Konzepts für das Kundenmanagement nicht bestätigt werden.

Crowd-sourced Publications

Reproducibility in Management Science

Citation: Management Science, Volume 70, Issue 3, pp. 1343-1356 (Download paper)

With the help of more than 700 reviewers, we assess the reproducibility of nearly 500 articles published in the journal Management Science before and after the introduction of a new Data and Code Disclosure policy in 2019. When considering only articles for which data accessibility and hardware and software requirements were not an obstacle for reviewers, the results of more than 95% of articles under the new disclosure policy could be fully or largely computationally reproduced. However, for 29% of articles, at least part of the data set was not accessible to the reviewer. Considering all articles in our sample reduces the share of reproduced articles to 68%. These figures represent a significant increase compared with the period before the introduction of the disclosure policy, where only 12% of articles voluntarily provided replication materials, of which 55% could be (largely) reproduced. Substantial heterogeneity in reproducibility rates across different fields is mainly driven by differences in data set accessibility. Other reasons for unsuccessful reproduction attempts include missing code, unresolvable code errors, weak or missing documentation, and software and hardware requirements and code complexity. Our findings highlight the importance of journal code and data disclosure policies and suggest potential avenues for enhancing their effectiveness.