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Working papers


The Department of Finance Research working papers are available below. 

If the working paper you would like to consult is not online, please contact Miriam Granadas and Sophie Lux

Working papers 2023


WP 1 The Fundamental Value of Art NFTs

Authors: Gilbert Fridgen, Roman Kräussl, Orestis Papageorgiou, Alessandro Tugnetti

Abstract: Art-related non-fungible tokens (NFTs) took the digital art space by storm in 2021, generating massive amounts of volume and attracting a large number of users to a previously obscure part of blockchain technology. Still, very little is known about the attributes that influence the price of these digital assets. This paper attempts to evaluate the level of speculation associated with art NFTs, comprehend the characteristics that confer value on them and design a profitable trading strategy based on our findings. We analyze 860,067 art NFTs that have been deployed on the Ethereum blockchain and have been involved in 317,950 sales using machine learning methods to forecast the probability of sale, the trade frequency and the average price. We find that NFTs are highly speculative assets and that their price and recurrence of sale are heavily determined by the floor and the last sale prices, independent of any fundamental value.


Working papers 2022


WP 8 A Test of the Modigliani-Miller Theorem, Dividend Policy and Algorithmic Arbitrage in Experimental Asset Markets

Authors: Tibor Neugebauer, Jason Shachat, Wiebke Szymczak


Modigliani and Miller showed that the market value of the company is independent of its capital structure, and suggested that dividend policy makes no difference to this law of one price. We experimentally test the MM theorem in a complete market with two simultaneously traded assets, employing two experimental treatment variations. The first variation involves the dividend stream. According to this variation the dividend payout order is either identical or independent. The second variation involves the market participation, or not, of an algorithmic arbitrageur. We find that Modigliani-Miller’s law of one price can be supported on average with or without arbitrageur when dividends are identical. The law of one price breaks down when dividend payout order is independent unless the arbitrageur keeps the asset prices in balance.


WP 7 Arbitrage Bots in Experimental Asset Markets

Authors: Martin Angerer, Tibor Neugebauer, Jason Shachat


Trading algorithms are an integral component of modern asset markets. In two experimental markets for long-lived correlated assets we examine the impact of alternative types of arbitrage-seeking algorithms. These arbitrage robot traders vary in their latency and whether they make or take market liquidity. All arbitrage robot traders we examine generate greater conformity to the law-of-one-price across the twin markets. However, only the liquidity providing arbitrage robot trader moves prices into closer alignment with fundamental values. The reduced mispricing comes with varying social costs; arbitrage robot traders’ gains reduce the earnings of human traders. We identify factors which drive differences in human trader performance and find that the presence of an arbitrage robot trader has no disproportionate effect on subjects’ earnings.


WP 6 Bank Competition and Bargaining over Refinancing

Authors: Marina Emiris, François Koulischer, Christophe Spaenjers


We model mortgage refinancing as a bargaining game involving the borrowing household, the incumbent lender, and an outside bank. In equilibrium, the borrower's ability to refinance depends both on the competitiveness of the local banking market and on the cost of switching banks. We find empirical support for the key predictions of our model using a unique data set containing the population of mortgages in Belgium. In particular, households' refinancing propensities are positively correlated with the number of local branches and negatively correlated with local mortgage market concentration. Moreover, households are more likely to refinance externally if they already have a relation with more than one bank, but the effect is mitigated if their current mortgage lender has a branch locally.


WP 5 Tax Subsidies and Housing Affordability

Authors: Anastasia Girshina, François Koulischer, Ulf von Lilienfeld-Toal, 


We argue that the effectiveness of tax subsidies to make housing affordable depends on four parameters: the elasticity of supply and demand, and the distribution of housing ownership and consumption. We estimate these parameters with administrative data on real estate transactions and survey data on household balance sheets in Luxembourg. Using kinks in the taxes on transactions and on new constructions, we find that the `leakage' of housing tax subsidies to the wealthier households is substantial. The top 10% of households by real estate wealth capture between 17% and 22% of the surplus from housing tax subsidies.


WP 4 Biased Auctioneers

Authors: Aubry Mathieu, Kräussl Roman, Manso Gustavo and Spaenjers Christophe


We construct a neural network algorithm that generates price predictions for art at auction, relying on both visual and non-visual object characteristics. We find that higher automated valuations relative to auction house pre-sale estimates are associated with substantially higher price-to-estimate ratios and lower buy-in rates, pointing to estimates’ informational inefficiency. The relative contribution of machine learning is higher for artists with less dispersed and lower average prices. Furthermore, we show that auctioneers’ prediction errors are persistent both at the artist and at the auction house level, and hence directly predictable themselves using information on past errors.

WP 3 A Review on ESG Investing: Investor's Expectations, Beliefs and Perceptions

Authors: Kräussl Roman, Tobi Oladiran, Denitsa Stefanova


This study examines the recent literature on the expectations, beliefs and perceptions of
investors who incorporate Environmental, Social, Governance (ESG) considerations in
investment decisions with the aim to generate superior performance and also make a societal
impact. Through the lens of equilibrium models of agents with heterogeneous tastes for ESG
investments, green assets are expected to generate lower returns in the long run than their non-
ESG counterparts. However, at the short run, ESG investment can outperform non-ESG
investment through various channels. Empirically, results of ESG outperformance are mixed.
We find consensus in the literature that some investors have ESG preference and that their
actions can generate positive social impact. The shift towards more sustainable policies in firms
is motivated by the increased market values and the lower cost of capital of green firms driven
by investors’ choices.

WP 2 Non-fungible Tokens (NFTs): A Review of Pricing Determinants, Applications and Opportunities

Authors: Kräussl Roman, Tugnetti Alessandro


This paper provides a review of the development of the non-fungible tokens (NFTs) market, with a particular focus on its pricing determinants, its current applications and future opportunities. We investigate the current state of the NFT markets and highlight the perception and expectations of investors towards these products. We summarize and compare the financial and econometric models that have been used in the literature for the pricing of non-fungible tokens with a special focus on their predictive performance. Our intention is to design a framework that can help understanding the price formation of NFTs. We further aim to shed light on the value creating determinants of NFTs in order to better understand the investors’ behavior on the blockchain.


WP 1 trajR, an R package for cluster analysis of time series

Authors: SCHILTZ, Jang and Cédric Noël

Abstract: We present the R package trajeR which provides all necessary tools to calibrate generalized finite mixture models, plot the results graphically and test the model adequacy.

We present the R package trajeR which provides all necessary tools to calibrate generalized finite mixture models, plot the results graphically and test the model adequacy. First, we give an overview of the generalized finite mixture model for clustering time series and describe the core function trajeR of the package trajeR. We give a step-by-step guideline on how to use the different available functions on simulated data sets with the three main underlying data distributions that appear in practice, the binary logit distribution, the (censored) normal distribution and the zero inflated Poisson distribution. Even though the estimation results are usually very similar, the trajeR package supports the two main estimations methods which are direct optimization of the derivative of the loglikelihood and the Expected Maximization Algorithm. It also allows to compute group membership probabilities for all subjects in the data set, to exhibit profiles for the clusters found in the analysis and provides a whole bunch of model adequacy criteria, together with the main model selection criteria.

Working papers 2021


WP 6 Institutional Investors and Infrastructure Investing

Authors: ANDONOV Aleksandar, KRÄUSSL Roman and D. RAUH Joshua 

Abstract: Institutional investors expect infrastructure to deliver long-term stable returns but gain exposure to infrastructure predominantly through finite-horizon closed private funds. The cash flows delivered by infrastructure funds display similar volatility and cyclicality as other private equity investments, and their performance depends similarly on quick deal exits. Despite weak risk-adjusted performance and failure to match the supposed characteristics of infrastructure assets, closed funds have received more commitments over time, particularly from public investors. Public institutional investors perform worse than private institutional investors, and ESG preferences and regulations explain 25-40% of their increased allocation to infrastructure and 30% of their underperformance.


WP 5 Algorithmic Trading in Experimental Markets with Human Traders: A Literature Survey 

Authors: NEKRASOVA, Elizaveta and Neugebauer, Tibor and Bao, Te; Riyanto, Yohanes E., 

Abstract: This chapter surveys the nascent experimental research on the interaction between human and algorithmic (bot) traders in experimental markets. We first discuss studies in which algorithmic traders are in the researcher’s hands. Specifically, the researcher assigns computer agents as traders in the market. We then followed it up by discussing studies in which the researcher allows human traders to decide whether to employ algorithms for trading or to trade by themselves. The paper introduces the types and performances of algorithmic traders that interact with human subjects in the laboratory, including zero-intelligent traders, arbitragers, fundamentalists, adaptive algorithms, and manipulators. We find that whether algorithm traders earn more profit than human traders crucially depends on the asset’s fundamental value process and the market environment. The potential impact of interactions with algorithms on the investor’s psychology is also discussed.


WP 4 Low Interest Rates and the Distribution of Household Debt

Authors: Marina Emiris, François Koulischer

Abstract: We study how changes in interest rates affect the borrowing of households and the distribution of debt within the population. In a model of household borrowing with credit constraints and endogenous house prices, we show that less constrained households with more pre-existing housing wealth increase their borrowing most when interest rates fall. We then use unique loan level data on the universe of household credit in Belgium to document a shift in the distribution of debt over age, with older households borrowing more as interest rates fell in the last decade. First-time borrowers, who are more likely to be constrained, do not contribute to the rise in household debt. To identify the elasticity of household debt to the interest rate, we use regulatory data on foreign exposures of banks and on the location of bank branches. We find that a 1 percentage point fall in the interest rate is associated with a 15% growth in household debt.


WP 3 Housing Affordability and Transaction Tax Subsidies

Authors: Anastasia Girshina, François Koulischer, Ulf von Lilienfeld-Toal

Abstract: House prices have increased faster than average income in many countries over the last decade, raising concerns on the affordability of housing. We study the impact of transaction taxes on the real estate market and the effectiveness of tax subsidies to make housing more affordable. We show how the demand and supply elasticities for housing determine the price impact of tax subsidies and the distribution of gains between buyers and sellers. We then use data on all real estate transactions in Luxembourg from 2007 to 2018 to estimate the elasticity of housing supply and demand. For identification, we exploit discontinuities in the transaction tax schedule as well as rules on tax subsidies for new constructions. Our estimates suggest that the elasticity of house prices to transaction taxes is 0.27, so buyers capture a large part of the surplus from the subsidies.


WP 2 Strategic Bias and Popularity Effect in the Prediction of Economic Surprises

Authors: Luiz F. F. Felix, Roman Kräussl, Philip A. Stork

Abstract: Professional forecasters of economic data are remunerated based on accuracy and positive publicity generated for their firms. This remuneration structure incentivizes them to stick to the median forecast but also to make bold forecasts when they perceive to have superior private information. We find that skewness in the distribution of expectations, potentially created by bold forecasts, predicts economic surprises across a wide range of US economic indicators in-sample and out-of-sample, confirming our hypothesis that forecasters behave strategically and possess private information. This strategic bias found in US economic forecasts is also exhibited in individual forecasters' data as well as in Continental Europe, the UK and Japan. We show that it has been increasing both through time and in relation to the behavioral anchor bias. Our results suggest that the pervasiveness of the biases depends on the popularity of the economic indicator being released, both in the US and internationally.


WP 1 Gendered Prices

Authors: Renee B. Adams, Roman Kräussl, Marco A. Navone, Patrick Verwijmeren

Abstract: We provide evidence that culture is a source of pricing bias. In a sample of 1.9 million auction transactions in 49 countries, paintings by female artists sell at an unconditional discount of 42.1%. The gender discount increases with measures of country-level gender inequality — even in artist fixed effects regressions. Our results are robust to accounting for potential gender differences in art characteristics and their liquidity. Evidence from two experiments supports the argument that women's art may sell for less because it is made by women. However, the gender discount reduces over time as gender equality increases.


Working papers 2020


WP 7 The Visible Hand when Revenues Stop: Evidence from Loan and Stock Markets during COVID-19

Authors: François Koulischer, Diane Pierret, Roberto Steri

Abstract: We document that public interventions in the corporate sector during the COVID-19 pandemic help firms access bank loans, cushion liquidity shortfalls, and boost their market valuations. We use firm-level data on COVID-19-related news to trace firms’ liquidity shocks in several European countries, which differ in public spending for fiscal stimulus and debt guarantees to corporations. As market valuations rebound in spite of the deterioration of firms’ revenues, interventions drive a part of the disconnect between markets and the real economy. Remarkably, the financial sector internalizes part of the benefits of interventions targeting non-financial firms. To interpret these results, we lay out a moral hazard model of corporate borrowing and public interventions. The model suggests that interventions in the corporate sector are effective to mitigate incentive problems leading to credit market failures. Lenders benefit from loan guarantees as a compensation to finance firms with severe debt overhang problems.


WP 6 Populism and Polarization in Social Media Without Fake News: The Vicious Circle of Biases, Beliefs and Network Homophily

Authors: Zaruhi Hakobyan, Christos Koulovatianos

Abstract: We build a model of network dynamics with decision-making under incomplete information in order to understand the determinants of the observed gradual downgrading of expert opinion on complicated issues and the decreasing trust in science. We suggest a search and matching mechanism behind network formation of friends, claiming that the internet has made search and matching less costly and more intensive. According to our simulations, just combining the internet's ease of forming networks with (a) individual biases, such as confirmation bias or assimilation bias, and (b) people's tendency to align their actions with those of peers, can lead to populist dynamics over time through a vicious circle. Even without fake news, biases lead to more network homophily and, over time, more homophily leads to actions that put more weight on biases and less weight on expert opinion. Networks make fundamental biases be enhanced by peer-induced amplification factors, a finding suggesting that education should perhaps focus on mitigating fundamental biases by promoting evidence-based attitudes towards complicated social and scientific issues.


WP 5 The Role of Labor-Income Risk in Household Risk-Taking?

Authors: Sylwia Hubar, Christos Koulovatianos, Jian Li

Abstract: In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor- income risk can explain much of this risk-taking pattern. Uncontrollable labor-income risk stresses middle-income households more because labor income is a larger fraction of their total lifetime resources compared with the rich. In response, middle-income households re-duce (controllable) financial risk. Richer households, having less pressure, can afford more risk-taking. The poor take low risk because they avoid jeopardizing their subsistence consumption.


WP 4 The Winner's Curse on Art Markets

Authors: Roman Kräussl, Elizaveta Mirgorodskaya

Abstract: We investigate the effect of overreaction in the fine art market. Using a unique sample of auction prices of modern prints, we define an overvalued (undervalued) print as a print that was bought for a price above (below) its high (low) auction pricing estimate. Based on the overreaction hypothesis, we predict that overvalued (undervalued) prints generate a negative (positive) excess return at a subsequent sale. Our empirical findings confirm our expectations. We report that prints that were bought for a price 10 percent above (below) its high (low) pricing estimate generate a positive (negative) excess return of 12 percent (17 percent) after controlling for the general price movement on the prints market. The price correction for overvalued (undervalued) prints is more pronounced during recessions (expansions).


WP 3 Predictable Biases in Macroeconomic Forecasts and Their Impact Across Asset Classes

Authors: Luiz F. F. Felix, Roman Kräussl, Philip A. Stork

Abstract: Professional forecasters of economic data are remunerated based on accuracy and positive publicity generated for their firms. This remuneration structure incentivizes them to stick to the consensus but also to make bold forecasts when they perceive to have private information. We find that bold forecasts create skewness in the distribution of expectations and predict economic surprises across a wide range of US economic indicators, confirming our hypothesis that forecasters behave strategically and possess private information. The prevalence of this rational bias depends on the attention given to the economic indicator being released. Further, expected surprises are predictive of returns across asset classes around data announcements but this relation is strongly conditioned on the stage of the economic cycle and on the economic release being inflation- or growth-related. The forecasters' rational bias in US macroeconomic forecasts is also exhibited in individual forecasters' data as well as in Continental Europe, the UK and Japan.


WP 2 Blockchain, Fractional Ownership, and the Future of Creative Work

Authors: Amy Whitaker, Roman Kräussl

Abstract: A core challenge in studying the real return on artists’ work is the extreme difficulty accessing private records from when an artwork was first sold and thus relying on public auction data. In addition, artists do not typically receive proceeds after the initial sale. This paper, for the first time, uses archivally sourced primary market records to model returns on art and introduces a novel fractional equity structure for artists. We first model what would happen if the American artists Jasper Johns and Robert Rauschenberg had retained 10% equity in their work when it was first sold. Secondly, we model a portfolio return using data from the Betty Parsons Gallery and the Green Gallery. To add a portfolio analysis to the performance of “star” artists, we model the galleries as a fund invested in all of artworks sold, using auction sales as the realization event. We find that the individual Johns and Rauschenberg works would have vastly outperformed equities markets. The gallery portfolio still substantially outperforms the S&P, even including 20% transaction costs. Beyond the art market, our larger conceptual framework for retained fractional equity has broad implications for compensation of early-stage creative work in any field and for potential applications of blockchain technology.


WP 1 An Experimental Comparison of Two Exchange Economies: Long-Lived Asset Versus Short-Lived Asset

Authors: Enrica Carbone, John D. Hey, Tibor Neugebauer

Abstract: The Lucas (1978) Tree Model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (2018), Asparouhova et al (2016) and Halim et al (2016), all of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation to the first two, extending their analyses from a two-period oscillating world to a three-period cyclical world; this is partly to test the robustness of their results. We also go one step further, and compare this solution (to a consumption-smoothing problem), in which consumption claims are traded via the long-lived asset, with the alternative solution provided by a market, in which agents can directly trade (short-lived) consumption claims between periods. We find that the latter exchange economy is more efficient in encouraging consumption smoothing than the economy with the long-lived asset. We find evidence of uncompetitive trading in both markets.

Working papers 2019


WP 9 Underpricing of Initial Public Offerings in Experimental Asset Markets

Authors: Sacha Füllbrunn, Tibor Neugebauer, Andreas Niklisch

Abstract: The underpricing of initial public offerings is a well-documented fact of empirical equity market research. Theories explain this underpricing with market imperfections. We study three empirically relevant IPO mechanisms under almost perfect market conditions in the laboratory: a stylized book building approach, a closed book auction, and an open book auction. We report underpricing in each of these IPO mechanisms. Uncertainty about the aftermarket behavior may partly explain IPO excess returns but underpricing persists even in the repeated setting where uncertainty is negligible and despite the equilibrium adjustment dynamics, that we observe in the data. The data reveal a market-wide impact of investors' reluctance to sell in the aftermarket at a price below the offering price. We conclude that a behavioural bias similar to the disposition effect fosters IPO underpricing in our setting.


WP 8 Understanding Alpha Decay

Authors: Julien Penasse

Abstract: In this paper, I argue that the ways asset pricing tests account for alpha decay are inadequate. Whenever an anomaly is traded away, its portfolio’s market value increases, leading to outsized positive realized returns. The anomaly will thus appear robust while it is in fact going extinct. A separate issue is that most asset pricing tests make a stationarity assumption tantamount to a constant population alpha. I show that as a result, average returns may be truly significant in sample and yet fail to continue in the future. Furthermore, average returns are biased upward when alpha decays. Using results in the literature, I show that the bias is about 1.4% per year for a typical anomaly. I provide a simple formula to correct for this effect and show how to incorporate alpha decay tests into the asset pricing toolkit.


WP 7 The Time-Varying Risk of Macroeconomic Disasters

Authors: Roberto Marfè, Julien Penasse

Abstract: The rare disasters model of asset prices suggests stock market variations reflect persistent fluctuations in the probability of a large decline in consumption. This paper estimates this probability from macroeconomic data alone, using a dataset of 42 countries over more than a century. We find that disaster risk is volatile and persistent, strongly correlates with the dividend-price ratio, and forecasts stock returns. Our evidence suggests that disaster risk can rationalize the equity premium and risk-free rate puzzles, the excess volatility puzzle, and the predictability of aggregate stock market returns by the dividend-price ratio. A variable disaster model calibrated with our risk estimates confirms these results under standard assumptions. While former works support the plausibility of disaster risk hypothesis, we provide direct evidence that disaster risk can rationalize price fluctuations.


WP 6 When a Master Dies: Speculation and Asset Float

Authors: Julien Penasse, Luc Renneboog, José Scheinkmann

Abstract: The death of an artist constitutes a negative supply shock to his future production. Intuition would thus suggest that this supply shock reduces the future auction volume of this artist. In finance terms, this supply shock reduces this artist’s float. If collectors have heterogeneous beliefs and speculate about fundamental value, a reduction in float may increase subsequent volume and prices (Hong et al., 2006). Since collectors cannot sell short, prices overweigh optimists’ beliefs and reflect a speculative bubble. The size of the bubble and trading volume are therefore proportional to the asset’s float, so that a negative supply shock increases prices and volume. We find strong support for this prediction in the data.


WP 5 The Empirical Saddlepoint Estimator

Authors: Benjamin HolcblatFallaw Sowell

Abstract: We define a moment-based estimator that maximizes the empirical saddlepoint (ESP) approximation of the distribution of solutions to empirical moment conditions. We call it the ESP estimator. We prove its existence, consistency and asymptotic normality, and we propose novel test statistics. We also show that the ESP estimator corresponds to the MM (method of moments) estimator shrunk toward parameter values with lower estimated variance, so it reduces the documented instability of existing moment-based estimators. In the case of just-identified moment conditions, which is the case we focus on, the ESP estimator is different from the MM estimator, unlike the recently proposed alternatives, such as the empirical-likelihood-type estimators.


WP 4  Do “Speed Bumps” Prevent Accidents in Financial Markets?

Authors: Jorge Goncalves, Roman Kräussl, Vladimir Levin

Abstract: Is it true that speed bumps level the playing field, make financial markets more stable and reduce negative externalities of high frequency trading (HFT) firms? We examine how the implementation of a particular speed bump -- Midpoint Extended Life order (M-ELO) on Nasdaq impacted financial markets stability in terms of occurrences of mini-flash crashes in individual securities. We use high frequency order book message data around the implementation date and apply difference-in-differences analysis to estimate the average treatment effect of the speed bump on market stability and liquidity provision. The results suggest that the introduction of the M-ELO decreases the average number of crashes on Nasdaq compared to other exchanges by 2.7 per a hundred stocks. Liquidity provision by HFT firms also improves. These findings imply that technology-based solutions by exchanges are feasible alternatives to regulatory intervention towards safer markets.


WP 3 Machines and Masterpieces: Predicting Prices in the Art Auction Market

Authors: Mathieu Aubry, Roman Kräussl, Gustavo Manso, Christophe Spaenjers

Abstract: We study the accuracy and usefulness of automated (i.e., machine-generated) valuations for illiquid and heterogeneous assets. We assemble a database of 1.1 million paintings that were auctioned between 2008 and 2015. We use a popular machine-learning technique—neural networks—to develop a price prediction algorithm based on both non-visual and visual artwork characteristics. Our out-of-sample valuations predict auction prices dramatically better than valuations based on a standard hedonic pricing model. Moreover, they help explaining price levels and sale probabilities even after conditioning on auctioneers’ pre-sale estimates. Machine learning is particularly helpful for assets that are associated with higher levels of ex-ante price uncertainty. Finally, we show that it can help overcome experts’ systematic biases in expectations formation.


WP 2 Rank-Order Competition in the Voluntary Provision of Impure Public Goods

Authors: Andrej Angelovski, Tibor Neugebauer, Maros Servatka

Abstract: Publicly provided goods often create differential payoffs due to timely or spatial distances of group members. We design and test a provision mechanism which utilizes rank competition to mitigate free-riding in impure public goods. In our Rank-Order Voluntary Contribution Mechanism (Rank-Order-VCM) group members compete via observable contributions for a larger share of the public good; high contributors receive preferential access (a larger share), while low contributors receive restricted access (a lower share). In a laboratory experiment Rank-Order-VCM elicits median contributions equal to the full endowment throughout the finitely played games with constant groups. In the control treatment, with randomly assigned ranks, the contributions are significantly lower and decline over time. We thus provide evidence of rank competition, in situations where discriminatory access to public goods is possible, being efficiency enhancing


WP 1 The Validity of Hedonic Models for Estimating Heterogeneous Assets Returns

Authors: Roman Kräussl, Thorsten Lehnert, Ali NasserEddine

Abstract: In this paper, we examine the validity of hedonic models for estimating heterogeneous assets returns. We look into the art markets, and show that the returns on hedonic indices strictly depend on the specifications of the model. Different sets of variables lead to different returns. This means that the researcher may implicitly decide on the performance of the hedonic index. These results are confirmed by conducting the same analysis on different samples, but they can be also deduced with simulated data. We conclude that hedonic models are sufficient for studying movements in the market; however, for studying art or other heterogeneous assets as an investment and comparing its performance to other asset classes, the repeat-sales models are more adequate.


Working papers 2018


WP 12 Demographics and FDI: Lessons From China’s One-Child Policy

Authors: John B. Donaldson, Christos Koulovatianos, Jian Li, Rajnish Mehra

Abstract: Lucas (1990) argues that the neoclassical adjustment process fails to explain the relative paucity of FDI inflows from rich to poor countries. In this paper we consider a natural experiment: using China as the treated country and India as the control, we show that the dynamics of the relative FDI flows subsequent to the implementation of China's one-child policy, as seen in the data, are consistent with neoclassical fundamentals. In particular, following the introduction of the one-child policy in China, the capital-labor (K/L) ratio of China increased relative to that of India, and, simultaneously, relative FDI inflows into China vs. India declined. These observations are explained in the context of a simple neoclassical OLG paradigm. The adjustment mechanism works as follows: the reduction in the (urban) labor force due to the one-child policy increases the savings per capita. This increases the K/L ratio and reduces the marginal product of capital (MPK). The reduction in MPK (relative to India) reduces the relative attractiveness of investment in China and is thus associated with lower FDI/GDP ratios. Our paper contributes to the nascent literature exploring demographic transitions and their effects on FDI flows.


WP 11 To Have and to Hold? The Optimal Holding Period of Art as an Investment

Authors: Roman Kräussl, Ali NasserEddine

Abstract: We analyze the optimal holding period of art as an investment and find that the returns generally increase with the length of the holding period. Nevertheless, we observe significant returns, accompanied with high levels of volatility, for trades made over very short time horizons. We notice that this ‘flipping’ practice has been increasing in recent years, and the average holding period for art has decreased. On the other hand, we consider the effect some special cases have on art investment returns. We find that artworks that trade frequently tend not to outperform the market. Moreover, the nature of an artwork’s ownership history doesn’t alter returns. We also examine the returns on artworks selected by experts, and find that, surprisingly, they underperform.


WP 10 The Fair Return on Art as an Investment: Accounting for Transaction Costs

Authors: Roman Kräussl, Ali NasserEddine

Abstract: This paper estimates the fair returns on art after accounting for transaction costs. We show that the mostly used methodologies become impractical when accounting for these costs. Based on the largest up-to-date database of repeat sales of fine art, we find that the average annual returns on art investment are significantly upwardly affected by the abnormal returns of the 1970s and 1980s. Including art in an optimal portfolio greatly depends on the sample period. We further find strong evidence supporting the existence of the masterpiece effect.


WP 9 On the Empirical Saddlepoint Approximation with Application to Asset Pricing

Authors: Benjamin Holcblat

Abstract : Moment-based estimation often yields instable estimates, such as the RRA (relative risk aversion) estimate in consumption-based asset pricing. This paper establishes novel theoretical results for the ESP (empirical saddlepoint) approximation, and then use them to investigate this instability. We prove that there exists an intensity distribution of the solutions to empirical moment conditions, and approximate it with the integral of the ESP approximation, calling the result the ESP intensity. Global consistency and asymptotic normality of the ESP intensity are proved. The application provides an explanation for the instability of the RRA estimates reported in the literature (fat and long right tail of the ESP approximation), and it suggests that consumption-based asset-pricing theory is more consistent with data than standard inference approaches indicate.


WP 8  The Subsidy to Infrastructure as an Asset Class

Authors: Aleksandar Andonov, Roman Kräussl, Joshua Rauh

Abstract: We investigate the characteristics of infrastructure as an asset class from an investment
perspective of a limited partner. While non-U.S. institutional investors gain exposure to
infrastructure assets through a mix of direct investments and private fund vehicles, U.S. investors
predominantly invest in infrastructure through private funds. We find that the stream of cash flows
delivered by private infrastructure funds to institutional investors is very similar to that delivered
by other types of private equity, as reflected by the frequency and amounts of net cash flows. U.S.
public pension funds perform worse than other institutional investors in their infrastructure fund
investments, although they are exposed to underlying deals with very similar project stage,
concession terms, ownership structure, industry, and geographical location. By selecting funds
that invest in projects with poor financial performance, U.S. public pension funds have created an
implicit subsidy to infrastructure as an asset class, which we estimate within the range of $730
million to $3.16 billion per year depending on the benchmark.


WP 7  Signalling or Marketing? The Role of Discount Control Mechanisms in Closed-End Funds

Authors: Roman Kräussl, Joshua Pollet and Denitsa Stefanova

Abstract: We study the relevance of signalling and marketing as explanations for the discount control
mechanisms that a closed-end fund may choose to adopt in its prospectus. These policies are
designed to narrow the potential gap between share price and net asset value, measured by the
fund’s discount. The two most common discount control mechanisms are explicit discretion to
repurchase shares based on the magnitude of the fund discount and mandatory continuation votes
that provide shareholders the opportunity to liquidate the fund. We find very limited evidence that
a discount control mechanism serves as costly signal of information. Funds with mandatory voting
are not more likely to delist than the rest of the CEFs in general or whenever the fund discount is
large. Similarly, funds that explicitly discuss share repurchases as a potential response do not
subsequently buy back shares more often when discounts do increase. Instead, the existence of
these policies is more consistent with marketing explanations because the policies are associated
with an increased probability of issuing more equity in subsequent periods.


WP 6  The Performance of Marketplace Lenders: Evidence from Lending Club Payment Data

Authors: Roman Kräussl, Zsofia Kräussl, Joshua Pollet, and Kalle Rinne

Abstract: Direct financing of consumer credit by individual investors or non-bank
institutions through an implementation of marketplace lending is a relatively new
phenomenon in financial markets. The emergence of online platforms has made this type of
financial intermediation widely available. This paper analyzes the performance of
marketplace lending using proprietary cash flow data for each individual loan from the
largest platform, Lending Club. While individual loan characteristics would be important for
amateur investors holding a few loans, sophisticated lenders, including institutional
investors, usually form broad portfolios to benefit from diversification. We find high riskadjusted
performance of approximately 40 basis points per month for these basic loan
portfolios. This abnormal performance indicates that Lending Club, and similar marketplace
lenders, are likely to attract capital to finance a growing share of the consumer credit
market. In the absence of a competitive response from traditional credit providers, these
loans lower costs to the ultimate borrowers and increase returns for the ultimate lenders.


WP 5  Reliability and Relevance of Fair Values: Private Equity Investments and Investee Fundamentals

Authors: Petrus Ferreira, Roman Kräussl, Wayne R. Landsman, Maria Nykyforovych, and Peter Pope.

Abstract: We directly test the reliability and relevance of fair values reported by listed private equity firms (LPEs), where the unit of account for fair value measurement attribute (FVM) is an investment stake in an individual investee company. FVMs are observable for multiple investment stakes, fair values are economically important, and granular data on investee economic fundamentals that should underpin fair values are available in public disclosures. We find that LPE fund managers determine valuations based on accounting- based fundamentals—equity book value and net income—that are in line with those investors derive for listed companies. Additionally, our findings suggest that LPE fund managers apply a lower valuation weight to investee net income if direct market inputs are unobservable during investment value estimation. We interpret these findings as evidence that LPE fund managers do not appear mechanically to apply market valuation weights for publicly traded investees when determining valuations of non-listed. We also document that
the judgments that LPE fund managers apply when determining investee valuations appear to be perceived as reliable by their investors.


WP 4  Experimental Stock Market Dynamics: Excess bids, directional learning, and adaptive style investing in a call-auction with multiple multiperiod lived assets

Authors: Reinhard Selten & Tibor Neugebauer

Abstract: We study the behavioral dynamics of limit orders in
simultaneous experimental call-auction markets with multiple multiperiod
lived securities. As analytical decision variable we use excess
bids; the number of submitted bids minus the number of offers. The
feedback variable is (excess) return. Our results suggest that excess bids
are predictive of qualitative asset returns, and that excess bids are
formed in an adaptive way. We conclude that the price trend or reversal
is reinforced by rejected excess bids and the fundamental laws of
demand and supply instigate a regression to the mean. Our analysis of
portfolio adjustment dynamics which is based on learning direction
theory shows that adaptive value-style investing and path-dependence
explain a significant share of individual behavior.


WP 3  Speculative Trading and Bubbles_Origins of Art Price Fluctuations

Authors: Julien Penasse and Luc Renneboog

Abstract: We examine the role of demand fundamentals and speculative trading in art
price dynamics. We show that price run-ups are followed by predictable busts.
Prices are positively correlated with proxies for art demand, in particular with the
wealth of the top 1% earners, but increases in top wealth also predict low returns.
Attributes of the price run-up, including price dispersion, volume, the share of
short-term trades, and the share of Postwar Art all contribute to predicting future
returns. We rationalize these findings in a stylized model of speculative trading
where the impossibility to sell short affects the art price formation.


WP 2  A test of the Modigliani-Miller invariace theorem and arbitrage in experimental Asset Markets 

Authors: Gary Charness & Tibor Neugebauer

Abstract: Modigliani and Miller (1958) show that a repackaging of asset return streams to
equity and debt has no impact on the total market value of the firm if pricing is arbitrage free.
We test the empirical validity of this invariance theorem in experimental asset
markets with simultaneous trading in two shares of perfectly-correlated returns. Our data
support value invariance for assets of identical risks when returns are perfectly correlated.
However, exploiting price discrepancies has risk when returns have the same expected
value but are uncorrelated, and we find that the law of one price is violated in this case.
Discrepancies shrink in consecutive markets, but seem to persist even with experienced
traders. In markets where overall trader acuity is high, assets trade closer to parity.


WP 1  Democratizing Art markets_FractionalOwnership and the Securitization of Art

Authors: Amy Whitaker, Roman Kräussl

Abstract: Using unique historical sales data from the Leo Castelli Gallery, we introduce a
novel model of evaluating art market returns using first-sale prices alongside auction results.
We create a sample portfolio to analyze what would have happened if the artists Jasper
Johns and Robert Rauschenberg had retained 10% equity in the work they sold through their
dealer in the years 1958 to 1963, which was the start-up phase of the artists’ careers.
We find that this retained-equity portfolio would have performed from 2.8 up to 140.8 times
better (Rauschenberg) and from 24.9 up to 986.8 times better (Johns) than the S&P 500 over
the same period. Modeling equity portfolios for artists changes the fundamental structure of
art markets. Because the fractional equity is a property right under the Coase theorem, this
system introduces a secondary market for shares in artwork. These shares could trade using
a technology such as the blockchain and would allow more democratic and diversifiable
access to investment in art markets. Our framework extends to other creative industries in
which early-stage work is difficult to value.


Working papers 2017


Market Fragility and the Paradox of the Recent Stock-Bond Dissonance

Authors:  Christos Koulovatianos, Jian Li, Fabienne Weber

Abstract: After the Lehman-Brothers collapse, the stock index has exceeded its pre-Lehman-Brothers peak by 36% in real terms. Seemingly, markets have been demanding more stocks instead of bonds. Yet, instead of observing higher bond rates, paradoxically, bond rates have been persistently negative after the Lehman-Brothers collapse. To explain this paradox, we suggest that, in the post-Lehman-Brothers period, investors changed their perceptions on disasters, thinking that disasters occur once every 30 years on average, instead of disasters occurring once every 60 years. In our asset-pricing calibration exercise, this rise in perceived market fragility alone can explain the drop in both bond rates and price-dividend ratios observed after the Lehman-Brothers collapse, which indicates that markets mostly demanded bonds instead of stocks.

  • Magnus Dahlquist, Julien Penasse
  • Xisong Jin, Thorsten Lehnert

Is Gender in the Eye of the Beholder? Identifying cultural attitudes with Art Auction prices

Authors: Renée Adams, Roman Kräussl, Marco Navone, Patrick Verwijmeren

Abstract: In the secondary art market, artists play no active role. This allows us to isolate cultural influences on thedemand for female artists’ work from supply-side factors. Using 1.5 million auction transactions in 45 countries, we document a 47.6% gender discount in auction prices for paintings. The discount is higher incountries with greater gender inequality. In experiments, participants are unable to guess the gender of an artist simply by looking at a painting and they vary in their preferences for paintings associated with female artists. Women's art appears to sell for less because it is made by women.

  • Jérôme Dugast 

Inefficient Market Depth_17.10

  • Jérôme Dugast 
  • Jérôme Dugast 

The Search for  Yield: Implications to Alternative Investments

Authors: Roman Kräussl, Thorsten Lehnert, and Kalle Rinne

Abstract: This paper reviews recent trends in alternative investments and their implications as the background for the Special Issue of the Journal of Empirical Finance on Alternative Investments. The historically low bond yields have brought new challenges to many investors in their search for yield, and led many of them to look outside traditional asset classes. The increased flows to alternative assets are motivated by their good performance and diversification benefits. Dynamic trading strategies used by hedge funds, and their increased presence in the financial markets are likely to have profound effects to financial market dynamics. Similarly, the large flows to commodities markets are likely to intensify the financialization of commodities market and its effects.

  • Tim Carle, Yaron Lahav, Tibor Neugebauer, Charles N. Noussair

Predictable Biases in Macroeconomic Forecasts

Authors: Luiz Félix, Roman Kräussl and Philip Stork

Abstract: This paper investigates how biases in macroeconomic forecasts are associated with economic surprises and market responses across asset classes around US data announcements. We find that the skewness of the distribution of economic forecasts is a strong predictor of economic surprises, suggesting that forecasters behave strategically (rational bias) and possess private information. Our results also show that consensus forecasts of US macroeconomic releases embed anchoring. Under these conditions, both economic surprises and the returns of assets that are sensitive to macroeconomic conditions are predictable. Our findings indicate that local equities and bond markets are more predictable than foreign markets, currencies and commodities. Economic surprises are found to link to asset returns very distinctively through the stages of the economic cycle, whereas they strongly depend on economic releases being inflation- or growth-related. Yet, when forecasters fail to correctly forecast the direction of economic surprises, regret becomes a relevant cognitive bias to explain asset price responses. We find that the behavioral and rational biases encountered inUS economic forecasting also exists in Continental Europe, the United Kingdom and Japan, albeit, to a lesser extent.

  • Manapol Ekkayokkaya, Pimnipa Foojinphan, Christian Wolff
  • Yuehao Lin, Thorsten Lehnert
  • Matthijs Lof, Jos Van Bommel

Implied Volatility Sentiment: A Tale of Two Tails

Authors: Luiz Felix, Roman Kräussl and Philip Stork

Abstract: Low probability events are overweighted in the pricing of out-of-themoney
index puts and single stock calls. This behavioral bias is strongly timevarying,
and is linked to equity market sentiment and higher moments of the riskneutral
density. We find that our implied volatility (IV) sentiment measure, jointly
derived from index and single stock options, explains investors' overweight of tail
events well. When employed within a trading strategy, our IV-sentiment measure
delivers economically significant results, which are more consistent than the ones
produced by the market sentiment factor. Out-of-sample tests on reversal
prediction show that our IV-sentiment measure adds value over and above
traditional factors in the equity risk premium literature.


Working papers 2016

  • Theoharry Grammatikos, Nikolaos Papanikolaou

The Winner's Curse on Art Markets

Authors: Roman Kräussl and Elizaveta Mirgorodskaya

Abstract: We investigate the effect of overreaction in the fine art market. Using a unique
sample of auction prices of modern prints, we define an overvalued (undervalued) print as a
print that was bought for a price above (below) its high (low) auction-pricing estimate. Based
on the overreaction hypothesis, we predict that overvalued (undervalued) prints generate a
negative (positive) excess return at a subsequent sale. Our empirical findings confirm our
expectations. We report that prints that were bought for a price 10 percent above (below) its
high (low) pricing estimate generate a positive (negative) excess return of 12 percent (17
percent) after controlling for the general price movement on the prints market. The price
correction for overvalued (undervalued) prints is more pronounced during recessions

  • Thorsten Lehnert
  • Thorsten Lehnert, Gudrun Rolle
  • Gudrun Rolle

The European Sovereign Debt Crisis: What Have We Learned?

Authors: Roman Kräussl, Thorsten Lehnert & Denitsa Stefanova

Abstract: This paper sets the background for the Special Issue of the Journal of Empirical
Finance on the European Sovereign Debt Crisis. It identifies the channel through
which risks in the financial industry leaked into the public sector. It discusses the
role of the bank rescues in igniting the sovereign debt crisis and reviews
approaches to detect early warning signals to anticipate the buildup of crises. It
concludes with a discussion of potential implications of sovereign distress for
financial markets.


Single stock call options as lottery tickets

Authors: Luiz Félix, Roman Kräussl, and Philip Stork

Abstract: This paper investigates whether the overpricing of out-of-the money single stock
calls can be explained by Tversky and Kahneman’s (1992) cumulative prospect
theory (CPT). We argue that these options are overpriced because investors
overweight small probability events and overpay for such positively skewed
securities, i.e., characteristics of lottery tickets. We match a set of subjective
density functions derived from risk-neutral densities, including CPT with the
empirical probability distribution of U.S. equity returns. We find that
overweighting of small probabilities embedded in CPT explains on average the
richness of out-of-the money single stock calls better than other utility functions.
The degree that agents overweight small probability events is, however,
strongly time varying and has a horizon effect, which implies that it is less
pronounced in options of longer maturity. We also find that time-variation in
overweighting of small probabilities is strongly explained by market sentiment,
as in Baker and Wurgler (2006).


Luiz Félix, Roman Kräussl, and Philip Stork

  • Julien Penasse
  • Jean-Daniel Guigou, Bruno Lovat, Nicolas Treich
  • Dennis Bams, Magdalena Pisa, Christian Wolff


Working Papers prior to 2016