• Working Paper

    • Decomposing Momentum: The Forgotten Component

      Joint work with Pascal Büsing and Susanne Siedhoff

      Abstract: We split up the standard momentum return over months t-12 to t-2 at the highest stock price within this formation period. Of the overall momentum profits in month t, 84% can be attributed to the return prior to this peak price although research has exclusively focused on the post-peak return so far. Contrary to standard momentum strategies, long-short returns based on the forgotten momentum component are positively skewed, avoid momentum crashes, show no market state dependence, and yield consistent return premiums in both the US and international stock markets.

      Available at SSRN

    • Disentangling Anomalies: Risk Versus Mispricing

      Joint work with Justin Birru and Trevor Young

      Abstract: Systematic mispricing primarily affects speculative stocks and tends to take the form of overpricing, predicting lower average returns. Because speculative stocks are typically deemed risky by rational models, failing to control for exposure to systematic mispricing can bias tests of risk-return tradeoffs. Controlling for the effects of systematic mispricing, we recover robust positive risk-return relations for a large number of cross-sectional risk proxies, including many low-risk and distress anomalies. We also recover robust positive illiquidity-return relations. We provide a unifying framework to explain a number of puzzles arising from the empirical failure of standard asset-pricing models and show that risk-return relations supporting rational models can be recovered from the data by accounting for the existence of time-varying common mispricing.

      Available at SSRN

    • A Catering Theory of Earnings Guidance: Empirical Evidence and Stock Market Implications

      Joint work with Nils Lohmeier

      Abstract: We propose and test a catering theory of earnings guidance. Managers cater to reference point dependent investor preferences by issuing excessively optimistic earnings forecasts if investors' stock returns are comparably low and vice versa. As predicted by our model, earnings guidance is most biased when managers strongly discount future outcomes, when the stock's payoff uncertainty is high, and when managers face low costs for issuing inaccurate forecasts. Additional analyses based on CEO turnover support intentional managerial catering as underlying mechanism. Catering via earnings guidance shapes stock market prices such that the convergence of stock prices towards fundamental values is delayed until the final earnings announcement.

      Available at SSRN

    • Probability Updating When Drawing Signals Without Replacement

      Joint work with Thomas Langer, Susanne Siedhoff, and Lennart Stitz

      Abstract: Individual biases in probabilistic belief updating have been typically examined in experimental settings where signals are drawn with replacement. Motivated by the variety of real world applications, we investigate belief updating in without replacement settings. In such settings, drawing a specific signal has two opposed effects on the likelihood to obtain another signal of the same type in a further draw. First, and equivalent to drawing with replacement, the signal provides information on the state of the world resulting in a higher probability to draw the same signal type again. Second, the drawn signal is removed reducing the probability to draw the same signal type again. We find that subjects severely underinfer with respect to the first effect and mildly underestimate the second effect.

      Available at SSRN

    • The Valuation of Loss Firms: A Stock Market Perspective

      Joint work with Susanne Siedhoff

      Abstract: The proportion of exchange-listed firms with negative earnings has increased to over 40% in recent years. Given that the fundamental value of these loss firms is difficult to determine, we expect particularly strong value effects among these firms. We find that the return predictability associated with book-to-market and revenue-to-price is indeed significantly stronger compared to gain firms. Our further analyses on financial analysts, earnings announcement returns, short selling activities, option trading, and limits to arbitrage support a behavioral mechanism for our main finding.

      Available at SSRN

    • Swimming Against the Current: Contrarian Retail Trading

      Joint work with Brad Cannon

      Abstract: Though short-term contrarian selling is viewed as a silver lining of retail trading, we provide evidence that much of this behavior appears to be the consequence of trading heuristics related to unrealized capital gains. Contrarian selling is common for positions trading at a gain while reverse-contrarian selling dominates when at a loss. The salience of portfolio positions as well as take-gain and stop-loss trading can explain this systematic variation in contrarian selling. We examine the asset pricing implications of such trading behavior and provide evidence that conditional contrarian selling impacts short-term return reversals and stock return volatility. Using stock splits as a natural experiment, our results lend support for a causal interpretation of our findings.

      Available at SSRN

    • Risk Premia – The Analysts' Perspective

      Joint work with Pascal Büsing

      Abstract: We examine the time-series and cross-section of stock market risk premia from the perspective of financial analysts. Our novel approach is based on the notion that analysts' stock recommendations reflect both their subjective return expectations and their perceived stock risk. Thus, we can empirically infer presumed risk premia from recommendations and target price implied expected returns. We show that analysts' presumed risk premia are strongly countercyclical such that their correlation with the VIX is 72%. Moreover, they predict future stock market returns and are closely related to the price-dividend ratio and other cyclical state variables. In the cross-section, the presumed risk premia are comparably large for high-beta, small, and value stocks lending support to a risk-based interpretation of these characteristics.

      Available at SSRN

    • Extreme Return Days and the Role of Purchase Prices

      Joint work with Brad Cannon

      Abstract: We provide evidence that purchase prices influence how investors behave towards extreme returns. Using a sample of individual investor trades and extreme return dates, we show that when a stock is trading farther from an investor’s purchase price, the investor is more likely to trade in the direction of the stock’s return. Consistent with a relative overreaction, stocks trading farthest from their average purchase price experience the most extreme returns, which are then followed by greater subsequent reversals. A cross-sectional strategy motivated by these findings earns a monthly alpha of 1.02%.

      Available at SSRN

    • The Visual Shape Score: On its Predictability in the Lab, the Aggregated Stock Market, and the Cross-Section of Stock Returns

      Joint work with Henning Cordes, Sven Nolte, and Judith C. Schneider

      Abstract: We introduce a simple and highly portable measure capturing the impact of price path visualizations on investor behavior, beliefs, and financial market outcomes: the visual shape score (VSS). The score reflects the degree of convexity of a price path. Although VSS is only a single metric, it captures four aspects of price path visualizations: bottom-up visual salience, top-down effects like evoked emotions, visual pattern recognition, and simplifications due to visualisation. Experimental findings suggest that more convex shapes positively explain investors' return expectations, their stated stock attractiveness, and investments. We augment the experimental results with field data. We find that VSS can help to better understand beliefs elicited from survey data and that VSS exhibits return predictability among individual stocks beyond a large range of cross-sectional return predictors.

      Available at SSRN

    • Preferences for Maximum Daily Returns: Evidence from a Discrete Choice Experiment

      Joint work with Maren Baars

      Abstract: It is commonly assumed that individual investors are attracted to stocks with high maximum daily returns (MAX) because they overweight low probabilities for large gains. This paper presents results from a discrete choice experiment that does not support a general preference for high-MAX stocks. When choosing between two stocks based on historical real-world returns, subjects systematically prefer low-MAX stocks although alternatives are matched in terms of risk-return-characteristics and return ordering. These experimental findings call for alternative explanations for the MAX effect beyond individuals' lottery preferences.

      Available at SSRN