Lieven Baele

Model Uncertainty, Financial Market Integration and the Home Bias Puzzle

This paper investigates to what extent ongoing integration has eroded the equity home bias. To measure home bias, we compare observed foreign asset holdings of 25 markets with optimal portfolio weights obtained from 5 benchmark models. The International CAPM optimal weights equal the relative world market capitalization shares. Alternative models that allow for various degrees of mistrust in the I-CAPM and involve returns data in computing optimal weights indicate a substantially lower yet positive home bias. For many countries, home bias decreases sharply at the end of the 1990s, a development which we link to time-varying globalization and regional integration.

Do stock markets discipline US bank holding companies : Just monitoring, or also influencing?

This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, using a partial adjustment model, that bank managers adjust the long-term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.

Cumulative Prospect Theory and the Variance Premium

Cumulative Prospect Theory (CPT) can explain the variance premium puzzle. We solve a simple equilibrium model with CPT investors and �?nd that probability weighting plays a key role in generating a substantial variance premium, while loss aversion captures the equity premium. Using GMM on a sample of U.S. equity and index-option returns between 1996 and 2010, our estimate of the probability distortion parameter implies that real-world investors in option markets distort probabilities signi�?cantly, but less so than subjects in lab experiments. We also show that the CPT model prices the cross-section of out-of-the-money index options well. In a dynamic setting, probability weighting and time-varying equity return volatility combine to match the observed time-series pattern of the variance premium.

Cumulative Prospect Theory, Option Returns, and the Variance Premium

Cumulative Prospect Theory (CPT) can explain the variance premium puzzle. We solve a simple equilibrium model with CPT investors and find that probability weighting plays a key role in generating a substantial variance premium, while loss aversion captures the equity premium. Using GMM on a sample of U.S. equity and index-option returns between 1996 and 2010, our estimate of the probability distortion parameter implies that real-world investors in option markets distort probabilities significantly, but less so than subjects in lab experiments. We also show that the CPT model prices the cross-section of out-of-the-money index options well. In a dynamic setting, probability weighting and time-varying equity return volatility combine to match the observed time-series pattern of the variance premium.

An Anatomy of Central and Eastern European Equity Markets

This paper provides a comprehensive and detailed analysis of Central and Eastern European (CEE) equity markets from the mid-1990s until now. Using firm-level data and custom-made indices and indicators, we show that (1) there is considerable heterogeneity in the degree, dynamics, and determinants of market development across the different markets, (2) that especially the smaller markets still offer diversification benefits to global investors, and (3) that there are substantial premiums associated with investing in small, value, low volatility and illiquid CEE stocks.