Working papers


The LSF Research working papers are available on IDEAS and on ECONPAPERS.

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


Working papers 2018


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

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

  • 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