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Portfolio choice with ETFs: Pitfalls and Progress (May 2025). With Tom Ernst and Holger Kraft.
The Markowitz-Merton portfolio theory prescribes that investors combine a riskfree asset with a portfolio of all risky assets. We identify four issues with implementing this through a stock market index ETF. First, physical ETFs hold only a subset of the market and may not weight the stocks as investors prefer. Second, some ETFs are synthetic and come with counterparty risk. Third, most stock indices and ETFs are not rebalanced to maintain constant weights, in contrast to the optimal Merton strategy. Fourth, mainstream ETFs disregard labor income. We quantify the impact of these issues on investor welfare and propose improvements.
Asset pricing with clustered, controllable disasters (December 2024). With Carina Fleischer, Holger Kraft, and Farina Weiss.
We develop a representative agent asset pricing model with tractable self-exciting consumption disasters. Compared to models with a constant disaster probability, our model increases the risk of consecutive shocks causing a large consumption drop over several years, as observed empirically. We introduce the possibility of controlling the magnitude or the probability of disasters through costly interventions. When calibrated to OECD data, the model matches the dynamics of economic disasters, the first three unconditional moments of consumption growth, the riskfree rate, the equity premium, and the stock market's price-dividend ratio using reasonable preference parameters and moderate jump sizes.
Older, inactive papers
Consumption and wage humps in a life-cycle model with education (Feb 2015). With Holger Kraft, Frank Seifried, and Mogens Steffensen.
Keep it simple: Dynamic bond portfolios under parameter uncertainty (Nov 2012). With Peter Feldhütter, Linda Sandris Larsen, and Anders Bjerre Trolle.
Dynamic asset allocation without a risk-free asset: What risks should be hedged? (March 2007)
Optimal investment strategies with a Heath-Jarrow-Morton term structure of interest rates (Oct 1999). With Carsten Sørensen.
Numerical methods for continuous-time, continuous-state stochastic control problems (Nov 1997)
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