Abstract. This paper uses unique administrative data and a quasi-field experiment of exogenous allocation to apartments in Sweden to estimate medium- and longer-run effects on financial behavior from exposure to financially literate neighbors. It contributes evidence of causal impact of financial literacy and points to a social multiplier of effective programs to enhance it. Exposure promotes saving in private retirement accounts and stockholding, especially when neighbors have economics or business education, but only for educated or male-headed households. Findings point to relevant knowledge transfer through social interactions rather than to labor market or other channels linked to local economic conditions.
Is Proprietary Trading Detrimental to Retail Investors? (with Falko Fecht and Andreas Hackethal), 2018, Journal of Finance 73, 1323-1361.
Abstract. We study the conflict of interest that arises when a universal bank conducts proprietary trading alongside its retail banking services. Our dataset contains the stock holdings of every German bank and those of their corresponding retail clients. We investigate (i) whether banks sell stocks from their proprietary portfolios to their retail customers, (ii) whether those stocks subsequently underperform, and (iii) whether retail customers of banks engaging in proprietary trading earn lower portfolio returns than their peers. We present affirmative evidence for all three questions and conclude that proprietary trading can, in fact, be detrimental to retail investors.
Incompatible European Partners? Cultural Predispositions and Household Financial Behavior (with Michael Haliassos and Thomas Jansson), 2017, Management Science 63, 3780-808.
Abstract. The recent influx of migrants and refugees into Europe and elsewhere raises questions as to whether migrant behavior reflects cultural predispositions and whether assimilation through exposure to host institutions can be expected. The paper focuses on financial behavior and uses high-quality administrative data on migrants and refugees to Sweden. It uncovers differences across cultural groups in how behavior relates to household characteristics, and shows that differences diminish with exposure to host country institutions, even for large cultural distances. Interestingly, robust cultural classification of European countries based on genetic distance or on Hofstede’s cultural dimensions fails to identify a single ‘southern’ culture but points to a ‘northern’ culture. Our results also have implications for the potential of European institutional harmonization, exogenously imposed during the fiscal crisis, to alleviate cultural differences in financial behavior.
Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households (with Turan G. Bali, Doruk Gunaydin, and Thomas Jansson) (Version: May, 2021)
Abstract. Contrary to the theoretical principle that higher risk is compensated with higher expected return, the literature shows that low-risk stocks outperform high-risk stocks. Using a large-scale household dataset, we provide an explanation for this puzzling result that the anomalous negative risk-return relation is only confined to those stocks held by rich households, whereas the anomaly disappears for stocks held by non-rich households and institutional investors. We find that skewness preference and optimism of rich households as well as their attention/attraction to lottery stocks explain wealthy investors’ demand for high-risk stocks, leading to overpricing and low future returns for such stocks.
Abstract. We demonstrate that increased automation has a significant negative impact on distribution of wealth. Households who are more exposed to industrial robots at work accumulate less wealth and experience greater downward mobility in the wealth distribution. The negative wealth effects of robots are not merely a consequence of differences in earned incomes or differential saving rates. We provide evidence that the adverse effects of rapid robotization on individual workers' human capital, and thereby, on their financial risk taking and investment behavior represent an additional important mechanism. Overall, the portfolio channel amplifies the inequality-enhancing effects of increased automation.
Abstract. We document a novel support mechanism by banks through coordinating the investments of their clients in their affiliated mutual funds that experience excessive withdrawals. New inflows from bank clients limit the adverse effects of financial distress on fund performance and further mitigate strategic complementarities in investor redemption decisions. Thus, banks serve as a coordination device for the investments of their clients and enable them to earn a premium from participating in this support mechanism. Overall, our results demonstrate the existence of a mutual support system within financial institutions and highlight the potential benefits of bank-affiliation for fund investors.
Abstract. This paper presents evidence of a new propagation mechanism for wealth inequality, based on differential responses, by education, to greater inequality at the start of economic life. It is motivated by a novel positive cross-country relationship between wealth inequality and perceptions of opportunity and fairness, which holds only for the more educated. Using unique administrative micro data and a quasi-field experiment of exogenous allocation of households, the paper finds that exposure to a greater top 10% wealth share at the start of economic life in the country leads only the more educated placed in locations with above-median wealth mobility to attain higher wealth levels and position in the cohort-specific wealth distribution later on. Underlying this effect is greater participation in risky financial and real assets and in self-employment, with no evidence for a labor income, unemployment risk, or human capital investment channel. This differential response is robust to controlling for initial exposure to fixed or other time-varying local features, including income inequality, and consistent with self-fulfilling responses of the more educated to perceived opportunities, without evidence of imitation or learning from those at the top.
Can Facebook Predict Stock Market Activity? (updated October, 2013)
Abstract. Using a novel and direct measure of investor sentiment, I find that Facebook's Gross National Happiness (GNH) has the ability to predict changes in both daily returns and trading volume in the US stock market. For instance, an increase of one standard deviation in GNH is associated with an increase of 11.23 basis points in market returns over the next day. Consistent with noise trader models, the influence of GNH on market returns is temporary and is reversed during the following trading weeks. I also verify the empirical validity of GNH by performing several tests in different natural settings.
Financial Advice: An Improvement for Worse? (updated June, 2013)
Abstract. In this paper, I analyze the role of financial advisors in individual investment decisions and ask whether financial advice is a reliable substitute for individuals' financial literacy. I report two main findings. First, I show that individuals who tend to be financially less sophisticated are more likely to consult professional advisors, which supports the notion that financial advice serves as a substitute for financial literacy. Second, when I analyze the impact of financial advice on portfolio choice, I find that, if anything, use of financial advice does not improve the quality of individuals' investment decisions. For example, I document that advised investors earn lower raw and risk-adjusted returns than self-directed investors, even before deducting advisory fees and transaction costs. Overall, the evidence presented in this study casts doubts on the ability of financial advice to serve as an effective substitute for financial literacy.