Financial intermediation and the role of price discrimination in the foreign exchange market

Foreign exchange trading is performed in opaque and decentralized markets. The two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We develop a theoretical pricing model that accounts for market-power considerations and analyze a database of the trades of a foreign exchange market maker. We find that the market maker generally exerts low bargaining power vis-á-vis customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information.     

Which past returns affect trading volume?

Anecdotal evidence suggests and recent theoretical models argue that past stock returns affect subsequent stock trading volume. We study 3,000 individual investors over a 51 month period to test this apparent link between past returns and volume using several different panel regression models (linear panel regressions, negative binomial panel regressions, Tobit panel regressions). We find that both past market returns as well as past portfolio returns affect trading activity of individual investors (as measured by stock portfolio turnover, the number of stock transactions, and the propensity to trade stocks in a given month). After high portfolio returns, investors buy high risk stocks and reduce the number of stocks in their portfolio. High past market returns do not lead to higher risk taking or underdiversification. We argue that the only explanations for our findings are overconfidence theories based on biased self-attribution and differences of opinion explanations for high levels of trading activity.     

FMPM Best Paper Award 2019

Financial Markets and Portfolio Management -     

Trading the forward bias: Are there limits to speculation?

In this paper we investigate whether trading the forward bias allows for economically significant excess returns. We find that bias-trading strategies can be viewed as attractive investment opportunities per se, useful diversification devices, and promising portfolio extensions for active fund managers trying to beat their benchmarks. The empirical results, which also mirror the problems arising in attempts to explain the puzzle by risk-premia, are consistent with market evidence that the bias is traded in practice. Overall, our findings suggest that limits to speculation are unlikely to provide a (stand-alone) explanation for the persistence of the forward bias.     

Modeling the dynamics of inflation compensation

This paper investigates the relationship between short-term and long-term inflation expectations using daily data on inflation compensation derived from the term structure of real and nominal interest rates. We use a flexible econometric model which allows us to uncover this relationship in a data-based manner. We relate our findings to the issue of whether inflation expectations are anchored, unmoored or contained. Our empirical results indicate no support for either unmoored or firmly anchored inflation expectations. Most evidence indicates that inflation expectations are contained.     

Integrating benefits decision making

Integrated employee benefit decision making helps employees use their benefits more wisely and identify opportunities to balance their immediate benefits needs (such as health care) and future benefits needs (such as retirement). This article discusses how employers can overcome employees' behavioral barriers to making integrated employee benefit decisions by changing the ways benefits are communicated and employees are presented with action decisions. Undertaking these steps allows employers to not only improve their employees' overall financial perspectives, but also furthers plan sponsors' goals of actively promoting personal responsibility with respect to retirement funding and changing employee behavior with respect to controlling health care costs.     

Business Alignment: Versicherungsfachwissen als Kernkompetenz der IT

Information technology (IT) of insurance companies refers to the variety of organizational units that are in charge of development, implementation and operation of the specific entrepreneurial IT-applications. Our analyses follow the notion that nowadays information technologies departments face increasing cost pressure and the modern reflex of introducing outsourcing-and offshoring-measures does not necessarily lead to cost reductions. Therefore a closer cooperation of IT departments and other organizational units is crucial and strengthens the improvement of competitiveness of the entire insurance company. Furthermore a method leading to a gradual Business Alignment of IT departments within insurance companies will be introduced.