Andreas Oehler

Portfolio Selection of German Investors: On the Causes of Home-Biased Investment Decisions

Real-world portfolio composition is often far from being mean-variance optimal. One of the phenomena documented in investment portfolios is the home-bias effect, that is, investors hold a higher-than-optimal portion of domestic assets. Analyzing hand-collected data from annual reports of German mutual funds, we find strong evidence for home-biased portfolio selection in the years 2000–2003. Besides this we document a “Europe bias,” that is, equities from European countries are strongly overrepresented. Furthermore, bounded rationality of private investors appears to drive suboptimal portfolio selection. The behavior and skill of mutual fund managers seems not to influence the overall home bias.

Venture Capital in Europe: Closing the Gap to the U.S.

We review recent developments in the European venture capital (VC) markets. For decades, most of the Continent has lagged behind the U.S. in attracting and retaining young entrepreneurs. Despite several governmental attempts to provide tax incentives and an appropriate infrastructure that would allow young start-up firms to establish themselves, European private and public markets for high-risk companies are still weak. While we document that Europe’s VC markets have grown considerably over the past eight years, European VC funds underperform U.S. funds by a significant margin. We explore the reasons behind this underperformance and discuss possible remedies. Our study draws important lessons from the U.S. to show how important a flourishing venture capital market is to a country’s economic development and how Europe may close the existing gap between the old and the new world.

Do key investor information documents enhance retail investors’ understanding of financial products? Empirical evidence

Purpose - – The purpose of this paper is to analyze whether key investor information documents (KIDs) provided by suppliers/issuers help retail investors to understand the key characteristics of financial products. KIDs are fact sheets composed to describe the characteristics of financial products in a brief, standardized and straightforward manner. Design/methodology/approach - – In the empirical analysis, the authors evaluate different versions of KIDs and examine whether they meet minimum requirements to provide benefits for consumers. Findings - – The empirical results suggest that subjects assess KIDs of suppliers/issuers merely as moderately appropriate to grasp the key characteristics of financial products. In contrast, neutral benchmark KIDs are generally evaluated as being superior to those of suppliers/issuers, which at best meet current legal requirements. Originality/value - – The authors argue that a major reason for these findings is consumer policy’s assumption of omnicompetent subjects in line with the neoclassical idea of a

Herding Behavior of Mutual Fund Managers in Germany

Herding behavior, i.e. the adjustment of a decision makers behavior, opinion, or expectations due to real or illusionary (social) pressures, can be explained by numerous behavioral finance models, such as the cascade model or contagion. However, unambiguous empirical results are rare, mainly due to differing methodologies used in previous studies. We analyze the buying and selling activities of the managers of German mutual funds that primarily invest in equities over the period from 2000 to 2005. Our dataset covers about 70 percent of the total investments of all German equity mutual funds. Our results reveal that there is considerable herding behavior when mutual fund managers face market-wide cash inflows or cash outflows. In addition, mutual funds that only invest in German equities display stock-picking herding behavior when selecting which stocks to invest in.

Are Investors Home Biased? Evidence from Germany

In most if not all countries the proportion of portfolio assets that investors allocate to foreign securities is clearly less than mean-variance analysis predicts. In Germany, for example, mutual funds hold only 66 percent of their investments in non-German securities while the latter represent almost 85 percent of the worldwide market value for bonds and 95 percent for equities. Even greater discrepancies exist for other financial intermediaries such as insurance companies or pension funds. Finally, the poorest portfolio diversification is exhibited by private German investors whose direct investments abroad only amount to 37 percent and 19 percent of their stock and bond holdings, respectively (for the year 2001: see Deutsche Bundesbank, 2001, 2004c).

„Check Verbraucherpolitik und Verbraucherbeteiligung“ – Empfehlungen für eine evidenzbasierte Verbraucherpolitik

ZusammenfassungDer Beitrag diskutiert die Möglichkeiten empirisch fundierter Entscheidungshilfen auf Grundlage einer unabhängigen und wissenschaftlich fundierten Verbraucherpolitikberatung. Auf Basis des Informationsparadigma und entsprechend dem Leitbild des „mündigen Verbrauchers“ wird in der Verbraucherpolitik meist vom rationalen, sich optimal informierenden und eigenständig entscheidenden Verbraucher ausgegangen. Praxis und verhaltensökonomische Forschung zeigen jedoch, dass dies keineswegs vorausgesetzt werden kann, sondern dass von ganz unterschiedlichen Rationalitäten und Verbrauchertypen auszugehen ist. Eine wirksame Verbraucherpolitik sollte sich daher am realen Verbraucherverhalten ausrichten. Inwieweit bestehende und geplante verbraucherpolitische Aktivitäten den Verbrauchern nützen und ob es jeweils wirksamere und wirtschaftlichere Alternativen zu bestehenden Regelungen gibt, ist häufig unklar. Die Autoren empfehlen daher die Einführung eines empirischen „Check Verbraucherpolitik und Verbraucherbeteiligung“ als Entscheidungshilfe und Evaluationstool für die Politik. Dieser muss unabhängig von der Regierung sein, vom realen Verbraucherverhalten ausgehen und mit Beteiligung von Verbrauchern durchgeführt werden. Die Autoren schlagen für diese Aufgabe einen unabhängigen Sachverständigenrat für Verbraucherpolitik vor.AbstractThe paper discusses the opportunities for an empirically grounded decision support system as an instrument for independent and scientifically based consumer policy consulting. To date, consumer policy is dominated by the information paradigm and the leitbild of the rational, sovereign and information-seeking consumer. Yet, both everyday practice and research in behavioural economics show that this view lacks empirical ground. In fact, there are different consumer types and different forms of rationalities at work. Effective consumer policy making should be based on the empirically revealed behaviour of consumers, not on an ideal model. Moreover, it is often not clear how much consumer policy measures actually contribute to the consumer interest, and whether there would be more effective and efficient policy instruments to strengthen the consumer position. The authors suggest introducing an empirically based “Check Consumer Policy and Consumer Participation” as a systematic decision and evaluation tool for policy makers. This check should be independent from the government and should be grounded on an empirical view of the consumer. Consumer policy tools should be tested with real consumers. The authors suggest an independent national “Expert Council for Consumer Policy” as an ideal candidate to supervise this work.

Style analysis of funds of hedge funds: Measurement of asset allocation and style drift

The main purpose of the study is to reveal how accurate Sharpe’s style analysis model is in the context of the analysis of funds of hedge funds. Therefore, we analyse the influence of the three parameters of a style analysis model, which are defined by the user: the number of indices which are in the set of investment indices, the length of the rolling time window and the nature of the return series (smoothed or unsmoothed). As we find that the unexplained Sharpe index volatilities for the hedge fund group indices are much higher and more stable as the ones for the hedge fund strategy indices, we can concluded that the former are more suitable for such an accurate style analysis model. Regarding the choice of the rolling time window, we find that the length of the rolling time window has practically no influence on the accuracy of the model. The influence of the unsmoothed return series depends on the used set of investment strategy indices. Regressions with unsmoothed return series of hedge fund strategy indices exhibit a higher J-statistic, whereas regression with unsmoothed return series of hedge fund group indices have lower J-statistics as the regression with smoothed return series.As we find that in general Sharpe’s method can distinguish only four hedge fund groups reasonably well from each other, its usage for the risk management tools is limited. Given the fact that each hedge fund strategy exhibits different forms or risk , like credit risk or market risk, a fine-grained decomposition is needed to get an accurate evaluation of the fund’s of hedge funds risks. For the purpose of performance evaluation and classification of fund’s of hedge funds a splitting into four broader hedge fund groups can be satisfactory in some cases.

The Disposition Effect — Evidence about the Investors Aversion to Realize Losses: A Contribution to Behavioral Finance through the Use of Experimental Call Markets

The paper analyses the results of a series of 13 experimental asset markets with 161 participants altogether regarding aspects of Behavioral Finance. Especially the disposition effect, the tendency of investors to hold investments that have lost value („losers“) too long and sell investments that have gained value („winners“) too early, is investigated. The disposition effect is one implication of extending the prospect theory to investing in financial assets. Of central importance is the reference point from which gains and losses are valued. Due to the fact that different people may use different reference points we tested for several reference points. The results for all used reference points demonstrate a strong preference of the participants for realizing winners rather than losers, meaning there is a great evidence on the existence of the disposition effect. The analyses of this paper have three main advantages. First, in contrast to most empirical analyses of the financial markets, which are realized on a high aggregation level, we can use individual’s data due to our experimental approach. For that reason we are able to deliver more detailed and conclusive results. Second, in comparison to other experimental asset markets the used design of a call market with an open orderbook is more realistic, because the assets are not liquidated after each trading period. Third, we determine the asset prices endogenously in a manner similar to the price fixing in realstock markets.

Verbraucherinformation und Verbraucherbildung

Das weit verbreitete Informationsparadigma oder Informationsmodell erzeugt die Illusion, jede und jeder konnte immer alles wissen und tun. Ergebnisse aus der Behavioral Economics & Finance und aus dem Bereich Neuro Economics legen jedoch nahe, dass Verbraucherinnen und Verbraucher nicht in jedem wichtigen Lebens- und Konsumbereich permanent alle wichtigen Informationen wahrnehmen, verarbeiten, abrufbar speichern und in ihrer Erwartungsbildung und Entscheidung berucksichtigen konnen. Einer einfachen, klaren, verstandlichen und vergleichbaren Verbraucherinformation kommt daher ebenso wie der Verbraucherbildung eine zentrale Rolle zu. Die Verbraucherbildung sollte unter anderem darauf fokussieren, die Wichtigkeit und Relevanz der Informationen, die fur eigene Problemlosungen geeignet erscheinen, selektieren zu konnen. Nicht so sehr zahlreiches Detailwissen, sondern vor allem eine sogenannte Meta-Bildung scheinen eher zielfuhrend zu wirken. In der Regel wird es darum gehen, zu lernen, wie man Expertise findet, ohne selbst jeweils Experte werden zu mussen.

Risk Assessment and Risk Management in Economics

Risk is a core aspect of decision-making in economic situations. This covers decision-making on both the corporate and the individual level, and also economic policy making including regulatory issues. However, risk is not limited to economic situations. Instead, risks may arise in every area of life which leads to the necessity of differentiated approaches to risk management and policy making depending on individual characteristics and risk exposures but also on respective situations in specific areas of life.The economic idea of risk management is based on the assumption that all possible states of the nature and the probability of their occurrence are known. Real-life economic situations, however, are characterized by ambiguity, which signifies a considerable lack of information regarding both potential outcomes and the probability of their occurrence. In order to mitigate the lack of measurability of ambiguity, simplifying assumptions therefore allow corporate decision-makers, policy makers and regulators alike to measure and evaluate risk and to apply risk models based on statistical loss distributions. Based on these models and distributions specific risk adjustment strategies can be implemented and monitored. To date, the academic discussion has to a large extent been characterized by these simplifying assumptions as well. Little attention has been paid to the risks that arise from the simplifying assumptions made in risk management. Our aim is to fill this gap in the literature. Specifically we focus on model risk, which follows either from (1) the use of a model that does not fit the situation (overoptimism), (2) the use of a model in a different way from or with a purpose other than that allowed (ignorance), or (3) the non-use of a model that would fit the situation (agnosticism).Model risk is treated only occasionally in the literature. However, in recent years, model risk has been discussed primarily in the context of financial institutions, such as banks, insurance companies and so on. With regard to the banking sector this development was fostered mainly in the context of supervision and regulatory measures included in the Basel accords (especially Basel II). Recently, models and their appropriateness have received increased attention even beyond a particular economic focus, namely in the political discussion of the stability of system-relevant banks and politically enforced stress tests of allegedly system-relevant financial institutions.In this chapter we analyse the causes of model risk and possible adverse consequences for stakeholders. Specifically, we focus on potentially inadequate decision-making and on illusion of control. In addition, we discuss possibilities to mitigate model risk on the basis of model risk management. Furthermore, we infer potential for further research on the adequacy of economic models.