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Research on International Finance

Contributing to the future of the Luxembourg financial sector

The Department of Finance at the Faculty of Law, Economics and Finance of the University of Luxembourg combines thorough theoretical research with data-heavy empirical work testing implications of theoretical considerations. For instance, DF researchers view the financial crisis not only as a challenge for economic agents, but also as an opportunity to develop a better understanding of financial crises.

Investigating both the supply and demand side of capital

The current research at the Department of Finance is generally concerned with how capital is allocated, and thus investigates both the supply and demand side of capital, explains Director Professor Christian Wolff: “Capital is supplied by households through intermediaries such as banks and financial markets, by institutional savers such as pension funds, and by alternative investors such as hedge funds. On the demand side, capital is used by households and firms funding their productive activities. Our researchers investigate the behaviour of financial markets including their risks and the pricing of financial securities, as well as the behaviour of market participants, such as financial institutions and individual investors.”

The impact of regulation and law on the development of financial markets and on the behaviour of financial agents is also a focal concern. The Department of Finance has developed a particular expertise in alternative investments like real estate, art and venture capital. In general, the research of the DF covers a wide range of areas, from pure academic research to private-public partnerships in finance. Christian Wolff: “DF research aims at developing programmes based on bilateral and well-balanced partnerships, especially with the financial centre of Luxembourg.”

Developing thoughtful and responsible financial leadership

Besides research, education is the DF’s second strategic pillar. Since 2002, some 300 students have graduated from the department’s flagship MSc in Banking and Finance programme. Recently, the DF launched a second Master programme, the Master in Wealth Management. Besides, its Doctoral School in Economics and Finance aims at providing doctoral candidates with a high-calibre research environment meeting the standards of the best universities in Europe and North America. Christian Wolf: “Our mission is to develop thoughtful and responsible financial managers and leaders, to expand the frontiers of knowledge, to influence business practice, and to contribute to the development of a stable Luxembourg financial sector.”

Roman Kräussl: world-renowned expert in investment in passion

Whether it be art, wine, fine timepieces or vintage cars, collectibles can be an investment in the future. Professor Roman Kräussl of the Department of Finance (DF) is a specialist in these alternative forms of investment.

‘Passion’ and ‘emotion’ are words that Roman Kräussl uses a lot; they are even part of his profession. This may seem surprising, at least when you learn that Roman Kräussl - after many years in Amsterdam - has now been teaching and researching as a professor at the Department of Finance for the last two years.

He developed his passion by specialising in alternative forms of investment in his professional life, in other words: his research focuses on investments in “beautiful” things. No wonder that he sometimes speaks of love or even compares the acquisition of a painting with having a relationship. The golden rule when investing in a work of art is to “buy what you like”, but that certainly does not exclude rational criteria. “When it comes to the emotional aspect, it’s about the true, deeper value of the artwork. You must love the piece for the long term. What’s more – as with red wine and classic cars – there are most certainly rational ways of determining value.”

Economist and psychologist

On the art market, these options include the so-called hedonic art price indices developed by Roman Kräussl based on over 4.6 million worldwide sales at auction over the last 100 years. However, such databases and the values they indicate drawn from experience do not alter the fact that alternative forms of investment are far less easy to evaluate than, for example, shares - which is also due to the aforementioned emotional components. So it is appropriate that the DF professor, aside from economic studies, has also focused on Behavioural Finance: “From the beginning, my academic interest lay in investors’ behaviour. My current specialist field arose from my own passion for art – and this has gradually been extended to cultural heritage in the broader sense as well as other alternative investments such as wine.”

Overcoming thematic boundaries

In his field Roman Kräussl is a world-renowned expert, who is regularly published in leading journals such as the Review of Financial Studies. He is also often present at conferences around the world and is featured in leading media such as the German-language ‘Manager Magazin’. In other words, he overcomes boundaries between science and the public, art and business. Overcoming barriers and building bridges are also among his duties at the DF's lecture hall, as he himself says: “When I’m teaching budding wealth managers, first of all I have to give many of my students an understanding of what words like ‘passion’ and ‘emotion’ have lost in a public finance course. As a rule, however, the initial scepticism in this case soon also gives way to a certain enthusiasm.”

Developing an early warning system for the art market

It’s not only shares and property whose prices can explode – prices on the art market can skyrocket as well. At the Department of Finance (DF), the phenomenon is being thoroughly explored.

Bubbles on the property and stock markets are almost a norm. But on the art market? “Large sums of money circulate on the art market. On one evening at Christie’s in New York, $142 million was paid for Francis Bacon’s triptych ‘Three Studies of Lucian Freud’ and $ 58 million for Jeff Koons' ‘Balloon Dog (Orange)’”, says Professor Roman Kräussl of the DF. The alternative investment specialist believes the general conditions of a speculative bubble therefore exist: “People talk about speculative bubbles when asset values are well above their fundamental value in periods of strong sales.”

Analysis of four segments

What makes the art market special is the few objective criteria and - as a result - the fact that there is no basis for calculating the aforementioned fundamental value. To counter the vague approaches, Kräussl and his colleagues have developed a new method that can detect an explosion in prices early. Based on information from his co-creation, the Blouin Art Sales Index (BASI), featuring around 4.6 million artworks, he has worked with colleagues to construct six individual art indices: “The indices divide art into the ‘Impressionist and Modern’, ‘Post-War and Contemporary’, ‘19th Century European’, ‘Old Masters’, ‘American’ and ‘Latin American’ segments. We try to recognise speculative bubbles early for each segment.”

Risk of a bubble rising again

According to Roman Kräussl, the segments “Impressionist and Modern” and “Post-War and Contemporary” each underwent a bubble between 1986 and 1991. Allegedly, neither was an accident: “From 1986, the economic bubble in Japan led to speculation on the art market. Investors had access to credit, as they benefited from skyrocketing property prices. They invested heavily in art - until the economy crashed in 1990.” In the ‘American’ market segment there was a bubble before the 2008 financial crisis, adds Kräussl, and it remains tense: “In the ‘American’ and ‘Post-war and Contemporary’ segments the corresponding signs have been increasing since 2012.”