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Sepcial Lecture: January 22, 2020
Zwetelina Iliewa (MPI)

Title: "Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Financial Markets" (together with Rawley Heimer, Alex Imas and Martin Weber).
Abstract: Many economically important settings, from financial markets to consumer choice, involve sequential decisions under risk. We use experiments and a unique dataset of traders' investment decisions to show that people making choices in such settings systematically deviate from their ex-ante plans. In two pre-registered studies (N = 940), participants made choices over whether to accept or reject fair gambles with feedback provided after every decision. We elicited participants' ex-ante strategies which characterized their desired risk-taking conditional on future outcomes. A large majority of participants reported “loss-exit” strategies, which involve taking on more risk after gains and stopping after losses. Actual behavior exhibited a reverse pattern: participants stopped substantially earlier after seeing gains than after experiencing losses. We find evidence for at least partial sophistication about this dynamic inconsistency, with participants being more likely to begin accepting risk if they could commit to an ex-ante strategy. However, this sophistication is limited in scope: participants are just as likely to begin taking on risk under soft commitment as when their strategies are binding, but systematically deviate from their plans similar to when no commitment is available. These patterns can be replicated in the field, using a unique brokerage dataset containing traders' limit orders (stop-loss and take-profit) and subsequent order revisions for 190,000 retail traders. Traders submit “loss-exit” strategies through their limit orders, but systematically deviate by lowering their stop-loss limits after experiencing losses and manually closing positions too early after gains. These findings offer strong support for the dynamic predictions of Cumulative Prospect Theory, thereby providing a parsimonious explanation for why investors and consumers routinely take ‘bad’ risk (e.g., casino gambling, speculation in risky asset markets, etc.). We discuss implications for evaluating the effects of recently proposed regulation that mandate non-binding commitment opportunities.

The lecture takes place at 13:15 at the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn.

Special Lecture: January 20, 2020
Negar Ghanbari (NHH, Norwegian School of Economics)
Do Creditor Rights Affect Financial Contracts? Evidence from the Anti-Recharacterization Statute.
Abstract: This paper examines the effect of creditor rights on bank loan contract design. Focusing on the conflict of interest between creditors, I study how bank lenders respond to a legal change that strengthens the rights of securitization creditors. Improving the power of securitization creditors to seize their collateral in bankruptcy reduces their incentives to maximize recoveries in chapter 11, increasing the risk of other competing creditors, such as banks. I find that loans granted to firms using asset securitization have higher interest rates, higher fees, smaller size, and more covenant restrictions after the law change. These effects are stronger for firms with higher default risk, for which the legal change may have a bigger impact. My findings thus highlight how increasing the power of some corporate creditors affects the other financial contracts of the firm.

The lecture takes place at 12:15 at the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn.

Special Lecture: January 14, 2020
Julia Reynolds (Università della Svizzera italiana, Lugano)

Title: Hedge Fund Redemption Restrictions and Stock Price Fragility
Abstract: This paper explores the idea that the increasing concentration of institutional ownership in equity markets makes stock prices more "fragile," i.e., more exposed to liquidity shocks to institutional investors. I argue that exposure to stock price fragility should be lower for institutional stockholders with stricter redemption policies, who are less likely to experience redemption-generated liquidity shocks. A hand-collected dataset of institutional block acquisitions reveals comparatively higher cumulative abnormal returns following block acquisitions by hedge funds with tighter redemption restrictions, confirming that the market places a value on strict redemption policies. Making the connection between redemption policies and stock price fragility, further tests reveal that hedge funds with strict redemption policies exhibit less portfolio turnover, and stocks held by high-restriction funds are less exposed to flow-induced liquidity trading. Finally, a difference-in-differences regression reveals that stocks purchased by institutional blockholders with stricter redemption policies experience a significant decrease in volatility.

The lecture takes place at 12:15 at the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn.

Special Lecture: January 13, 2020
Magdalena Rola-Janicka (University of Amsterdam)
“The Political Econony of Prudential Regulation"
Abstract: This paper studies the equilibrium level of prudential regulation in a framework with negative borrowing externalities. A debt limit is implemented by a politician appointed through majoritarian elections. As voting allows borrowers to internalize the externality, equilibrium regulation restores constrained efficiency whenever the politician can commit to enforce it universally. Under selective enforcement, a captured regulator may exempt politically connected borrowers from regulation. Depending on the electoral power of the connected borrowers, the outcome may be an either too lax or too strict policy. The analysis deepens the understanding of the role of political economy factors in affecting equilibrium regulation. Additional results highlight the impact of income inequality on the strictness of the policy.

The lecture takes place at 12:15 at the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn.

Christian Kubitza won the Ernst Meyer Preis, August 23, 2019
For his outstanding dissertation on the topic of „Financial Stability and Insurance Markets“, Kubitza was awarded with this price.
Further details can be found here

Christian Kubitza won the Frankfurter Preis 2019
Kubitza was honoured for his outstanding scientific work in the field of insurance science.
Further details can be found here

Tuesday, 12:15-1:30 PM in the Faculty Lounge (more details)

January 21, 2020 - Marie Hoerova (ECB Research)

January 28, 2020 - Steven Ongena (Universität Zürich)