Research

PUBLISHED PAPERS 

Pandemic portfolio choice (with Holger Kraft), European Journal of Operational Research, 2023.

COVID-19 has taught us that a pandemic can significantly increase biometric risk and at the same time trigger crashes of the stock market. Taking these potential co-movements of financial and non-financial risks into account, we study the portfolio problem of an agent who is aware that a future pandemic can affect her health and personal finances. The corresponding stochastic dynamic optimization problem is complex: It is characterized by a system of Hamilton-Jacobi-Bellman equations which are coupled with optimality conditions that are only implicitly given. We prove that the agent's value function and optimal policies are determined by the unique global solution to a system of non-linear ordinary differential equations. We show that the optimal portfolio strategy is significantly affected by the mere threat of a potential pandemic.

Bequest motives in consumption-portfolio decisions with recursive utility (with Holger Kraft and Claus Munk ), Journal of Banking and Finance, 2022.

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors who are able to take advantage of all sources of predictability with unskilled investors ignoring predictability. For an unskilled investor the certainty equivalent of wealth is 0.3–6.8% lower than for a skilled investor, depending on the market entry date. We also determine the effect of luck to enter the market at a favorable time. Across market entry dates, skilled but unlucky investors can lose up to 15.4% compared to unskilled but lucky investors.

A numerical approach to solve consumption-portfolio problems with predictability in income, stock prices, and house prices, Mathematical Methods of Operations Research, 2021.

In this paper, I establish a numerical method to solve a generic consumption-portfolio choice problem with predictability in stock prices, house prices, and labor income. I generalize the SAMS method introduced by Bick et al. (Manag Sci 59:485–503, 2013) to state-dependent modifiers. I set up artificial markets to derive closed-form solutions for my life-cycle problem and transform the resulting consumption-portfolio strategies into feasible ones in the true market. To obtain transformed-feasible strategies that are close to the truly, unknown optimal strategies, I introduce state-dependent modifiers. I show that this generalization of the SAMS method reduces the welfare losses from over 10% to less than 2%.

Predictors and portfolios over the life cycle (with Holger Kraft and Claus Munk), Journal of Banking and Finance, 100: 1-27, 2019.

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors who are able to take advantage of all sources of predictability with unskilled investors ignoring predictability. For an unskilled investor the certainty equivalent of wealth is 0.3–6.8% lower than for a skilled investor, depending on the market entry date. We also determine the effect of luck to enter the market at a favorable time. Across market entry dates, skilled but unlucky investors can lose up to 15.4% compared to unskilled but lucky investors.

Consumption-portfolio choice with preferences for cash (with Holger Kraft), Journal of Economic Dynamics and Control, 2019. 

This paper studies a consumption-portfolio problem where money enters the agent’s utility function. We solve the corresponding Hamilton–Jacobi–Bellman equation and provide closed-form solutions for the optimal consumption and portfolio strategy both in an infinite- and finite-horizon setting. For the infinite-horizon problem, the optimal stock demand is one particular root of a polynomial. In the finite-horizon case, the optimal stock demand is given by the inverse of the solution to an ordinary differential equation that can be solved explicitly. We also prove verification results showing that the solution to the Bellman equation is indeed the value function of the problem. From an economic point of view, we find that in the finite-horizon case the optimal stock demand is typically decreasing in age, which is in line with rules of thumb given by financial advisers and also with recent empirical evidence. Our results are robust to introducing recursive utility.

Growth options and firm valuation (with Holger Kraft and Eduardo Schwartz), European Financial Management 24, 2018.

This paper studies the relationship between firm value and a firm's growth options. We find strong empirical evidence that Tobin's Q increases with firm-level volatility. The significance mainly comes from R&D firms, which have more growth options than non-R&D firms. By decomposing firm-level volatility into its systematic and unsystematic part, we document that only idiosyncratic volatility has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Sorting on idiosyncratic volatility yields a significant negative relationship between portfolio alphas and contemporaneous idiosyncratic volatility for non-R&D portfolios.

WORKING PAPERS

How well do women sell? (with Carina Fleischer and Holger Kraft), 2023.

This paper documents a gender revenue gap arising when individuals sell personal belongings such as china, jewelry, paintings, toys, and furniture. We study a novel data set that is hand-collected from a popular TV show which is watched every weekday by more than 2 million people. The median appraisal value of an item is 500 euros and the total value of all items sold is about 1,490,000 euros. The sales occur through an English auction during which sellers can try to influence the outcome and post-auction negotiation with the highest bidder is possible. After controlling for a host of covariates, women lose on average about 8.5% compared to men. We document heterogeneity across items: Women perform better if they sell items that are congruent with the female gender role or items where the value is easier to determine (e.g., through the value of the raw material). We further show that the relative performance of women depends on both seller characteristics (age, education, attractiveness, optimism, sentiment) and dealer-team characteristics (generosity, activeness, pushiness, and average age of male dealers). Finally, we provide evidence that female teams perform significantly better than single females. In fact, they do as well as single males.

All working papers can be downloaded from SSRN.