Theses

Theoretical part of the task:

• Separate the empirical evidence of investor participation from the assumptions of classical portfolio theory. Motivate and explain determinants of participation.
• Formulate a probit model in accordance with relevant models from the literature. Introduce the probit regression.
• Among other things, you will deal with estimation using the maximum likelihood method.

 Empirical part of the task:

• Check the developed model by means of a panel data set.
• Explicitly refer to the definitions you used to create variables and describe the data set.
• Perform the estimation of the probit model and interpret your results.

Basic literature:

• Grinblatt, M., Keloharju, M., and Linnainmaa, J. (2011): IQ and stock market participation. The Journal of Finance, 66 (6), 2121-2164.
• Kaustia, M. and Torstila, S. (2011): Stock market aversion? Political preferences and stock market participation. Journal of Financial Economics, 100(1), 98-112.
• Van Rooij, M., Lusardi, A., and Alessie, R. (2011): Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449-472.
• Brooks, C. (2019): Introductory Econometrics for Finance. Fourth edition. Cambridge, United Kingdom; New York, NY: Cambridge University Press.
• Polkovnichenko, V. (2005): Household Portfolio Diversification: A Case for Rank-Dependent Preferences. The Review of Financial Studies, 18(4), 1467–1502.
• Malmendier,  U. and Nagel, S. (2019): Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?. The Quarterly Journal of Economics, 126(1), 373–416.

 Data:

• Refinitiv Workspace
• Refinitiv Datastream
• LISS Panel

Theoretical part of the task:

• Define sustainability criteria (e.g. ESG) and explain the Morningstar-Sustainability-Ranking.
• Give an overview of the relevant literature of performance measurements and explain common descriptive and risk-adjusted performance measurements.

Empirical part of the task:

• Calculate and compare performance measurements for different categories of sustainability funds and a market benchmark.
• Identify and interpret differences between the categories.

Basic literature:

• Bauer, R., Koedijk, K., and Rotten, R. (2005): International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 29(7), 1751-1767.
• Brooks, C. (2019): Introductory Econometrics for Finance. Fourth edition. Cambridge, United Kingdom ; New York, NY: Cambridge University Press.
• Schroeder, M. (2006): Is there a Difference? The Performance Characteristics of SRI Equity Indices. Journal of Business Finance & Accounting, 34(1-2), 331-348.

Data:

• Database of Richard Stehle
• Morningstar
• Refinitiv Workspace

Theoretical part of the task:

• Provide an overview of the relevant literature on the forecasting of credit defaults of companies and individuals.Pay special attention to so-called P2P loans.
• Identify relevant characteristics of private debtors that potentially affect the risk of credit default.
• Explain the logit regression and address the marginal effects and the ROC procedure.
• Set up a logit model to estimate the probability of default of personal loans.

Empirical part of the task:

• Analyse the Lending Club data set and present the characteristics of the loans granted there.
• Do you estimate the logit model set up on the basis of the data, can defaults be forecast?

Basic literature:

• Emekter, R., Tu, Y., Jirasakuldech, B., and Lu, M. (2015): Evaluating credit risk and loan performance in online Peer-to-Peer (P2P) lending. Applied Economics, 47(1), 54-70.
• Hull, J. (2018): Risk management and financial institutions. Hoboken, New Jersey: Wiley & Sons.
• Brooks, C. (2014): Introductory econometrics for finance. Cambridge: Cambridge University Press. 

Data:

• Lending Club Privatkredite, via kaggle.com

Theoretical part of the task:

• Describe the momentum anomaly and explain how to construct the momentum strategy.
• Note both advantages and disadvantages of the momentum strategy. In particular, focus on momentum crashes.
• Outline the risk management strategies of Barroso and Santa-Clara (2015) and Dierkes and Krupski (2022).

Empirical part of the task:

• Estimate the momentum strategy for the U.S. market over the period from 1926 to 2022.
• Implement the risk management strategies of Barosso and Santa-Clara (2015) and Dierkes and Krupski (2022).
• Outline both advantages and disadvantages of each strategy.

Basic literature:

• Barroso, P. and Santa-Clara, P. (2015): Momentum has its moments. Journal of Financial Economics, 116(1), 111–120.
• Cooper, M.J., Gutierrez, R.C., and Hameed, A. (2004): Market States and Momentum. The Journal of Finance, 59(3), 1345–1365.
• Dierkes, M. and Krupski, J. (2022): Isolating momentum crashes. Journal of Empirical Finance, 66, 1-22.
• Daniel, K. and Moskowitz, T.J. (2016): Momentum crashes. Journal of Financial Economics, 122(1), 221–247.
• Jegadeesh, N. and Titman, S. (1993): Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. The Journal of Finance, 48(1), 65–91.

Data:

• Kenneth French's database

Theoretical part of the task:

• Derive the Capital Asset Pricing Model (CAPM) and explain why the use of additional factors can be a useful extension.
• Outline the three-factor model of Fama and French (1993).
• Explain the value and the size effect on which the three-factor model is built.

Empirical part of the task:

• Calulate the risk factors yourself using monthly price data.
• Analyze to which extend multi-factor models can increase the explanability of return data.
• Explicitly conduct a performance test against the CAPM.
• What influence do the factors of value and size have on returns? Do they match your expectations? 

Basic literature:

• Fama, E. F. and French, K. R. (1993): Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.
• Fama, E. F. and French, K. R. (1992): The cross-section of expected stock returns. Journal of Finance, 47(2), 427–465.
• Fama, E. F. and French, K. R. (2015): A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22.

Data:

• Kenneth French's database
• CRSP
• Refinitiv Workspace

Theoretical part of the task:

• Empirical research shows a strong negative relationship between returns and idiosyncratic volatility.
• Derive why in neoclassical finance theory idiosyncratic volatility should not affect returns.
• Introduce the so-called idiosyncratic volatility puzzle and provide an overview of relevant related literature. Explain possible solutions to the puzzle.

Empirical part of the task:

• Calculate idiosyncratic volatilities for a cross-section of stocks.
• Evaluate pricing effects of idiosyncratic volatility using portfolio formation and investigate whether they are significant.

Basic literature:

• Ang, A., Hodrick, R. J., Xing, Y., and Zhang, X. (2006): The cross‐section of volatility and expected returns. Journal of Finance, 61(1), 259-299.
• Ang, A., Hodrick, R. J., Xing, Y., and Zhang, X. (2009): High idiosyncratic volatility and low returns: International and further US evidence. Journal of Financial Economics, 91(1), 1-23.
• Bali, T. G. and Cakici, N. (2008): Idiosyncratic volatility and the cross section of expected returns. Journal of Financial and Quantitative Analysis, 43(01), 29-58.

Data:

• CRSP
• Refinitiv Workspace

Theoretical part of the task:

• Short-Term Reversal is one of the most distinctive anomalies in asset pricing. Explain the (short-term) reversal effect and show why this effect counteracts the weak form of the efficient market hypothesis.
• Introduce to the relevant literatur.
• Provide an overview of the different explanatory approaches.

Empirical part of the task:

• Conduct an empirical analysis of the short term reversal effect using linear regression and portfolio formation.
• Investigate whether the short term reversal effect can be explained by capital market models (e.g. CAPM, Fama-French three factor model).

Basic literature:

• Jegadeesh, N. (1990): Evidence of predictable behavior of security returns. Journal of Finance, 45(3), 881-898.
• Jegadeesh, N. and Titman, S. (1995): Short-horizon return reversals and the bid-ask spread. Journal of Financial Intermediation, 4(2), 116-132.
• Campbell, J. Y., Grossman, S. J., and Wang, J. (1993): Trading volume and serial correlation in stock returns. Quarterly Journal of Economics, 108, 905–939.
• Kelly, B., Moskowitz, T., and Pruitt, S. (2021): Understanding Momentum and Reversal. Journal of Financial Economics, 140(3), 726-743.

Data:

• Kenneth French's database
• CRSP US Stock Databases
• Refinitiv Workspace

Theoretical part of the task:

• Introduce the topic of economic uncertainty and distinguish this concept from other concepts relevant to finance such as risk and investor sentiment.
• Introduce the literature on uncertainty measurement and explain the different methodological approaches. In this context, explain in detail the derivation of two selected measures.
• Explain why economic uncertainty can have a theoretical impact on real and financial economics.  In this context, present empirical literature that examines the relationship between uncertainty and financial markets.

Empirical part of the task:

• Perform a descriptive analysis of the selected uncertainty measures.
• Analyze the relationship between the selected uncertainty measures and stock returns using regression models.

Basic literature:

• Bloom, N. (2014): Fluctuations in Uncertainty. Journal of Economic Perspectives, 28(2), 153-176.
• Brogaard, J., and Detzel, A. (2015): The Asset-Pricing Implications of Government Economic Policy Uncertainty. Management Science, 61(1), 3-18.
• Jurado, K., Ludvigson, S. C., and Serena, N. (2015): Measuring Uncertainty. American Economic Review, 105(3), 1177-1216.
• Knight, F.H. (1921): Risk, Uncertainty and Profit. Houghton Mifflin Company, Boston, 682-690.

Data:

• Refinitiv Workspace
• FRED
• Datenbank von Sydney Ludvigson
• EPU Datenbank

Theoretical part of the task:

• Standard methods for calculating the cost of capital use realized returns as an approximation for expected future returns. Implicit cost of capital offer an alternative in which the estimator for the cost of capital is derived implicitly and ex ante from a valuation model.
• Give an introduction into the valuation of companies.
• Derive the cost of capital model according to Ohlson and Juettner-Nauroth (2005).
• The cost of capital model above requires forecasts of earnings. Explain how earnings can be estimated via regression using the model of Hou et al. (2012). Additionally, address advantages and disadvantages for using estimates from analysts as alternative.

Empirical part of the task:

• Conduct an empirical analysis of implicit capital costs at firm and market level for the German (European) stock market.
• Compare the implied cost of capital estimates when using analyst forecasts and when using earnings forecasts by the model of Hou et al. (2012), respectively. 

Basic literature:

• Hou, K., Van Dijk, M. A., and Zhang, Y. (2012): The implied cost of capital: A new approach. Journal of Accounting and Economics, 53(3), 504–526.
• Ohlson, J. A. and Juettner-Nauroth, B. E. (2005): Expected eps and eps growth as determinants of value. Review of accounting studies, 10(2), 349–365.

Data:

• CDAX/STOXX Europe 600 (from Refinitiv Workspace)
• I/B/E/S Estimates

Brief description of the area

Investor sentiment is an important element of Behavioral Finance. Hence, there are numerous studies to analyze the impact of investor sentiment on stock markets. In addition to sentiment measures, recent studies particularly focus on the effects of sentiment on individual and aggregated stock returns. However, both are not conclusively clarified areas of research.

Possible topics (among others) are

1. Measuring investor sentiment: alternatives to the Baket and Wurgler (2006) sentiment Index
2. Investor sentiment and stock returns
3. Investor sentiment and the risk-return trade-off
4. Effects of investor sentiment on capital market anomalies

Basic literature

• De Long, B.J., Shleifer, A., Summers, L.H., and Waldman, R.J. (1990): Noise Trader Risk in Financial Markets. Journal of Political Economy, 98(4), 703–738.
• Baker, M. and Wurgler, J. (2006): Investor sentiment and the cross-section of stock returns. The Journal of Finance, 61(1), 1645–1680.
• Kozak, S., Nagel, S., and Shrihari, S. (2018): Interpreting Factor Models. The Journal of Finance, 73(3), 1183–1223.
• Yu, J. and Yuan, Y. (2011): Investor sentiment and the mean–variance relation. Journal of Financial Economics, 100(2), 367–381.
• Stambaugh, R.F., Yu, J., and Yuan, Y. (2012): The short of it: Investor sentiment and anomalies. Journal of Financial Economics, Special Issue on Investor Sentiment, 104(2), 288–302.

Brief description of the area

Preferences are a behavioral approach to explain the observed deviations of individual investors' behavior from the predictions of neoclassical theory. As of now, the most important theories for decision making under risk are the (Cumulative) Prospect Theory and the Salience theory.

Possible topics (among others) are

• Portfolio insurance strategies under Cumulative Prospect Theory and Salience Theory
• The salience effect on the stock market
• Expected returns under Cumulative Prospect Theory
• Skewness preferences and security prices

Basic literature

• Bordalo, P., Gennaioli, N., and Shleifer, A. (2012): Salience theory of choice under risk. The Quarterly Journal of Economics, 127(3), 1243-1285.
• Tversky, A. and Kahneman, D. (1992): Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and uncertainty, 5(4), 297-323.
• Dichtl, H. and Dobritz, W. (2011): Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products. Journal of Banking & Finance, 35(7), 1683-1697.
• Cosemans, M. and Frehen, R. (2017): Salience Theory and Stock Prices: Empirical Evidence. Working Paper.
• Barberis, N. and Huang, M. (2008): Stocks as Lotteries: The Implications of Probability Weighting for Security Prices. American Economic Review, 95(5), 2066-2100.
• Barberis, N., Mukherjee, A., and Wang, B. (2016): Prospect Theory and Stock Returns: An Empirical Test. Review of Financial Studies, 29(11), 3068-3107.

Kurzbeschreibung des Themenbereichs

Sustainability is progressively gaining prominence in investment considerations. Beyond purely financial factors, the inquiry emerges as to the impact of the environmental, social, and governance (ESG) dimensions on both corporations and investors, and how a company's ESG performance influences its returns.

Themenbeispiele

1. Construction and analysis of an ESG pricing factor
2. Estimation of the ex-ante Greenium by Implied Cost of Capital
3. Measurement of "Climate Change" and Analysis of the Risk Premium of Climate Change Betas or Climate Change Risks
4. Analysis of the Impact of Weather and Pollution on Stock Returns

Basisliteratur

• Pástor, Ľ., Stambaugh, R., and Taylor, L.A. (2021): Sustainable investing in equilibrium. Journal of Financial Economics, 142(2), 550-571.
• Pástor, Ľ., Stambaugh, R. F., and Taylor, L. A. (2022): Dissecting green returns. Journal of Financial Economics, 146(2), 403-424.
• Ardia, D., Bluteau, K., Boudt, K., and Inghelbrecht, K. (2023): Climate change concerns and the performance of green vs. brown stocks. Management Science. 
• Sautner, Z., Van Lent, L., Vilkov, G. and Zhang, R. (2023): Firm-Level Climate Change Exposure. The Journal of Finance, 78(3), 1449-1498.
• Sautner, Z., Van Lent, L., Vilkov, G. and Zhang, R. (2023): Pricing Climate Change Exposure. Management Science.
• Loughran, T. and Schultz, P. (2004): Weather, Stock Returns, and the Impact of Localized Trading Behavior. Journal of Financial and Quantitative Analysis,  39(2), 343-364.
• Ding, X., Guo, M., and Yang, T. (2021): Air pollution, local bias, and stock returns. Finance Research Letters, 39, 1-6.
• Hirshleifer, D. and Shumway, T. (2003): Good Day Sunshine: Stock Returns and the Weather. The Journal of Finance, 58(3), 1009-1032.

Brief description of the area

The literature provides numerous empirical studies that contradict the predictions of neoclassical theory. In addition to proving the existence and robustness of anomalies across markets and market regimes, examining different approaches to explain the anomalies are of particular interest and can be investigated in the context of your master thesis.

Possible topics (among others) are

1. Out-of-sample tests of selected anomalies (e.g. momentum, idiosyncratic volatility, betting-against-beta, max effect)
2. Anomalies and multi-factor models
3. Interaction of anomalies (e.g. skewness and momentum)
4. Risk management strategies and anomalies

Basic literature

• Ang, A., Hodrick, R.J., Xing, Y., and Zhang, X. (2006): The cross‐section of volatility and expected returns. Journal of Finance, 61(1), 259-299.
• Jegadeesh, N. and Titman, S. (1993): Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. The Journal of Finance, 48(1), 65–91.
• Frazzini, A. and Pedersen, L.H. (2014): Betting against beta. Journal of Financial Economics, 111(1), 1–25.
• Bali, T.G., Cakici, N., and Whitelaw, R.F. (2011): Maxing out: Stocks as lotteries and the cross-section of expected returns. Journal of Financial Economics, 99(2), 427-446.
• Hou, K., Mo, H., Xue C., and Zhang, L. (2019): Which Factors?. Review of Finance, 23(1), 1-35.
• Barroso, P., Detzel, A.L., and Maio, P.F (2020): Managing the Risk of the Low-Risk anomaly. Working Paper.
• Kelly, B. T., Pruitt, S., and Su, Y. (2019). Characteristics are covariances: A unified model of risk and return. Journal of Financial Economics, 134(3): 501–524.

Brief description of the area

Although machine learning algorithms are becoming increasingly important, they have rarely been used in empirical capital market research. Thus, the comparison of new and established methods provides numerous research questions.

Possible topics (among others) are

1. Empirical asset pricing and machine learning
2. Multi factor models and artificial neural networks

Basic literature

• Hastie, T., Tibshirani, R., and Friedman, J. (2017): The Elements of Statistical Learning 2nd Edition. Springer Verlag.
• Gu, S., Kelly, B., and Xiu, D. (2020): Empirical asset pricing via machine learning. The Review of Financial Studies, 33(5), 2223-2273.
• Gu, S., Kelly, B., and Xiu, D. (2021): Autoencoder asset pricing models. Journal of Econometrics, 222(1): 429–450.
• Gareth, J., Witten, D., Hastie, T., and Tibshirani, R. (2017): An Introductoin to Statistical Learning: With Applicatoins in R. Springer Verlag, New York.
• Hou, K. and Lee, J. (2018): Nonlinear CAPM Beta. Working Paper.
• Dimson, E. (1979): Risk measurement when shares are subject to infrequent trading. Journal of Financial Economics, 7(2), 167-226.

Brief description of the area

Market prices of derivatives and, in particular, options provide rich information about market participants' expectations about the future. The elicitation of these expectations is possible via well-known option pricing models, such as Black & Scholes (1973), or numerous model-free approaches.

Possible topics (among others) are

1. Estimation of risk-neutral moments from option prices
2. Option-implied risk preferences
3. Market indicators of volatility and skewness: VIX and SKEW
4. Risk premia for variance and skewness
5. Option pricing and estimation of the volatility surface using neural networks

Basic literature

• Bakshi, G., Kapadia, N., and Madan, D. (2003): Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options. Review of Financial Studies, 16(1), 101–143.
• Breeden, D.T. and Litzenberger, R.H. (1978): Prices of State-contingent Claims Implicit in Option Prices. Journal of Business, 51(4), 621-651.
• Jackwert, J. (2000): Recovering Risk Aversion from Option Prices and Realized Returns. The Review of Financial Studies, 13(2), 433-451.
• Liu, Z. and Faff, R. (2017): Hitting SKEW for SIX. Economic Modelling, (64), 449-464.
• Bollerslev, T., Tauchen, G., and Zhou, H. (2009): Expected Stock Returns and Variance Risk Premia. The Review of Financial Studies, 22(11), 4463-4492.
• Carr, P. and Wu, L. (2009): Variance risk premiums. Review of Financial Studies, 22(3), 1311-1341.

Brief description of the area

Portfolio selection is one of the classic areas of research in finance. Results not only depend on investor preferences, but also on the data generating process and the investment horizon. While neoclassical models explore the optimal portfolio choice, it is equally important to apply behavioral analyses in order to understand why many people do not engange in the stock market and how investors make portfolio choices.

Possible topics (among others) are

1. The optimal portfolio choice under ambiguity
2. The optimal portfolio choice with a long investment horizon and predictability
3. The influence of estimation risk on the optimal portfolio selection
4. Portfolio selection under behavioral decision theories
5. Participation in the stock market

Basisc literature

• Garlappi, L., Uppal, R., and Wang, T. (2007): Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach. The Review of Financial Studies, 20(1), 41-81.

• DeMiguel, V., Garlappi, L., and Uppal, R. (2009): Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?. The Review of Financial Studies, 22(5), 1915–1953.

• Barberis, N. (2000): Investing for the Long Run when Returns Are Predictable. The Journal of Finance, 55, 225-264.

• Chapman, D.A. and Polkovnichenko, V. (2009): First‐Order Risk Aversion, Heterogeneity, and Asset Market Outcomes. The Journal of Finance, 64, 1863-1887.

• Grinblatt, M., Keloharju, M., and Linnainmaa, J. (2011): IQ and stock market participation. The Journal of Finance, 66 (6), 2121-2164.
• Kaustia, M. and Torstila, S. (2011): Stock market aversion? Political preferences and stock market participation. Journal of Financial Economics, 100(1), 98-112.
• Van Rooij, M., Lusardi, A., and Alessie, R. (2011): Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449-472.
• Brooks, C. (2019): Introductory Econometrics for Finance. Fourth edition. Cambridge, United Kingdom ; New York, NY, Cambridge University Press.
• Polkovnichenko, V. (2005): Household Portfolio Diversification: A Case for Rank-Dependent Preferences. The Review of Financial Studies, 18(4), 1467–1502.
• Malmendier, U. and Nagel, S. (2011): Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?. The Quarterly Journal of Economics, 126(1), 373–416.

Brief description of the area

Although Modigliani and Miller (1958) document that - when assuming a perfect market - capital structure is irrelevant, there are numerous studies to show that this result does not hold empirically. More recent studies, such as Baker and Wurgler (2002), show that financing decisions (and thus capital structure), in particular, depend on market timing.

Possible topics (among others) are

1. Empirical validation of theories on IPO underpricing
2. Long-term performance of IPOs
3. Market timing of financing decisions
4. Forecast of earnings and implied cost of capital

Basic literature

• Ritter, J. R. (1991): The long‐run performance of initial public offerings. The Journal of Finance, 46(1), 3-27.

• Loughran, T. and Ritter, J. R. (2002): Why don’t issuers get upset about leaving money on the table in IPOs?. The Review of Financial Studies, 15(2), 413-444.
• Ritter, J. R. and Welch, I. (2002): A review of IPO activity, pricing, and allocations. The Journal of Finance, 57(4), 1795-1828.
• Green, T. C. and Hwang, B. H. (2012): Initial public offerings as lotteries: Skewness preference and first-day returns. Management Science, 58(2), 432-444.
• Laeven, L. and Levine, R. (2007): Is there a diversification discount in financial conglomerates?. Journal of Financial Economics, 85(2), 331-367.
• Baker, M. and Wurgler, J. (2002): Market timing and capital structure. The Journal of Finance, 57(1), 1-32.
• Hou, K., Van Dijk, M. A., and Zhang, Y. (2012): The implied cost of capital: A new approach. Journal of Accounting and Economics, 53(3), 504–526.