Journal of Financial Economics, 2022
Abstract: We study the link between beta predictability and the price of risk. An investor who desires exposure to a certain risk factor needs to predict what next period's beta will be. We use a simple model to show that an ambiguity averse agent's demand is lower when betas are hard to predict, leading to a reduction in risk premiums. We test the implications for downside betas and VIX betas. We find that they have economically and statistically small prices of risk once we account for the fact that an investor cannot observe ex-post realized betas when determining asset demand.
Abstract: We investigate whether teams exhibit increased or reduced overreaction in expectation formation relative to individuals. To that end, we focus on belief overreaction in a financial context, where biases in beliefs are known to be pervasive at the individual level. Using a sample of US money managers and a within-subject design, we find that teams greatly attenuate their own members’ overreaction to the recent performance of a financial investment. In a series of preregistered online experiments where we elicit beliefs about future investment returns directly, we again find similar evidence of a lower overreaction to recent information in teams. Via additional experimental treatments, we quantitatively decompose the team effect into three channels—internal reflection, self-selection, and external screening—and find that the vast majority of the reduction in overreaction is attributable to self-selection.
Abstract: Investors leave large amounts of money on the table when investing in index funds, a popular investment product that accounts for 40% of U.S. equity funds. I show that even though high fees strongly predict poor performance, investors have little sensitivity to fees. This can be explained by fund intermediation in the retail sector and the legal standard of care that intermediaries have towards their clients. Net inflows to high-fee funds are higher when brokers and financial advisors receive sales commissions from the investment management company. When funds are sold through intermediaries held to higher standard of care, such as those sold to employer sponsored defined contribution pension plans, this is no longer the case. Together, this evidence suggests imposing fiduciary duties on fund intermediaries improves investor welfare.
Runner-up for Best Paper Award in the FMA 2020 annual conference.