Selected publications from our research team
- Jacobs, Heiko: Market Maturity and Mispricing. In: Journal of Financial Economics, Vol 2016 No 122, p. 270-287. doi:10.1016/j.jfineco.2016.01.030Full textCitationAbstractDetails
Relying on the Stambaugh, Yu, and Yuan (2015) mispricing score and on 45 countries between 1994 and 2013, I document economically meaningful and statistically significant cross-sectional stock return predictability around the globe. In contrast to the widely held belief, mispricing associated with the 11 long/short anomalies underlying the composite ranking measure appears to be at least as prevalent in developed markets as in emerging markets. Additional support for this conjecture is obtained, among others, from tests for biased expectations based on the behavior of anomaly spreads surrounding earnings announcements as well as from within-country variation in development.
- Hillert, Alexander; Jacobs, Heiko; Müller, Sebastian: Media Makes Momentum. In: Review of Financial Studies, Vol 2014 No 27, p. 3467-3501. doi:https://doi.org/10.1093/rfs/hhu061Full textCitationAbstractDetails
Relying on 2.2 million articles from 45 national and local U.S. newspapers between 1989 and 2010, we find that firms particularly covered by the media exhibit ceteris paribus significantly stronger momentum. The effect depends on article tone, reverses in the long-run, is more pronounced for stocks with high uncertainty, and stronger in states with high investor individualism. Our findings suggest that media coverage can exacerbate investor biases, leading return predictability to be strongest for firms in the spotlight of public attention. These results collectively lend credibility to an overreaction-based explanation for the momentum effect.
- Heiko Jacobs, Alexander Hillert: Alphabetic Bias, Investor Recognition, and Trading Behavior. In: Review of Finance, Vol 2016 No 20, p. 693-723. doi:10.1093/rof/rfv060Full textCitationAbstractDetails
Extensive research has revealed that alphabetical name ordering tends to provide an advantage to those positioned in the beginning of an alphabetical listing. This paper is the first to explore the implications of this alphabetic bias in financial markets. We find that U.S. stocks that appear near the top of an alphabetical listing have about 5% to 15% higher trading activity and liquidity than stocks that appear towards the bottom. The magnitude of these results is negatively related to firm visibility and investor sophistication. International evidence and fund flows further indicate that ordering effects can affect trading activity and liquidity.
- Heiko Jacobs, Martin Weber: The Trading Volume Impact of Local Bias: Evidence from a Natural Experiment. In: Review of Finance, Vol 2012 No 16, p. 867-901. doi:10.1093/rof/rfr022Full textCitationAbstractDetails
Exploiting several regional holidays in Germany as a source of exogenous cross-sectional variation in investor attention, we provide evidence that the well-known local bias at the individual level materially affects stock turnover at the firm level. The German setting offers favorable characteristics for this natural experiment. Stocks of firms located in holiday regions are temporarily strikingly less traded, both in statistical and economic terms, than otherwise very similar stocks in non-holiday regions. This negative turnover shock is robust and survives various tests for cross-sectional differences in information release. It is particularly pronounced in stocks less visible to non-local investors, and for smaller stocks disproportionately driven by retail investors. Our findings contribute to research on local bias, determinants of trading activity and limited attention.
- Heiko Jacobs, Martin Weber: On the Determinants of Pairs Trading Profitability. In: Journal of Financial Markets, Vol 2015 No 23, p. 75-97. doi:10.1016/j.finmar.2014.12.001Full textCitationAbstractDetails
We perform a large-scale empirical analysis of pairs trading, a popular relative-value arbitrage approach. We start with a cross-country study of 34 international stock markets and uncover that abnormal returns are a persistent phenomenon. We then construct a comprehensive U.S. data set to explore the sources behind the puzzling profitability in more depth. Our findings indicate that the type of news leading to pair divergence, the dynamics of investor attention as well as the dynamics of limits to arbitrage are important drivers of the strategy's time-varying performance.
- Jacobs, Heiko; Müller, Sebastian; Weber, Martin: How should individual investors diversify? An empirical evaluation of alternative asset allocation policies. In: Journal of Financial Markets, Vol 2014 No 19, p. 62-85. doi:10.1016/j.finmar.2013.07.004Full textCitationAbstractDetails
This paper evaluates numerous diversification strategies as a possible remedy against widespread costly investment mistakes of individual investors. Our results reveal that a very broad range of simple heuristic allocation schemes offers similar diversification gains as well-established or recently developed portfolio optimization approaches. This holds true for both international diversification in the stock market and diversification over different asset classes. We thus suggest easy-to-implement allocation guidelines for individual investors.
- Jacobs, Heiko: What Explains the Dynamics of 100 Anomalies?. In: Journal of Banking and Finance, Vol 2015 No 57, p. 65-85. doi:https://doi.org/10.1016/j.jbankfin.2015.03.006Full textCitationAbstractDetails
Are anomalies strongest when investor sentiment or limits of arbitrage are considered to be greatest? We empirically explore these theoretically deducted predictions. We first identify, categorize, and replicate 100 long-short anomalies in the cross-section of expected equity returns. We then comprehensively study their interaction with popular proxies for time-varying market-level sentiment and arbitrage conditions. We find a powerful (relatively weak) role of the variation in proxies for sentiment (arbitrage constraints). In this context, the predictive power of sentiment is mostly restricted to the short leg of strategy returns. Our insights collectively suggest that the dynamics of sentiment combined with the base level (and not primarily the variations) of limits to arbitrage provide at least a partial explanation for inefficiencies.
- Heiko Jacobs, Martin Weber: Losing Sight of the Trees for the Forest? Attention Allocation and Anomalies. In: Quantitative Finance, Vol 2016 No 16, p. 1679-1693. doi:https://doi.org/10.1080/14697688.2016.1169311Full textCitationAbstractDetails
This paper tests asset pricing implications of the investor attention shift hypothesis proposed in theoretical work.We create a novel proxy for the dynamics of inattention towards firm-specific information and explore its impact on prominent return anomalies. As hypothesized and with all else equal, the proxy positively predicts the post-earnings-announcement drift as well as the profitability of pairs trading, and negatively predicts the success of momentum strategies. Taken together, our findings highlight the importance of time-varying investor attention allocation for the price discovery process.
- Jacobs, Heiko: The role of attention constraints for investor behavior and economic aggregates: what have we learnt so far?. In: Management Review Quarterly, Vol 2015 No 65, p. 217-237. doi:10.1007/s11301-015-0112-5Full textCitationAbstractDetails
Motivated by insights from psychology, a growing body of behavioral finance research highlights the importance of investors’ attention constraints. Collectively, this work suggests that time-series and cross-sectional variation in attention might not only materially affect the quality of market participants’ individual decision making, but eventually also matter for economic aggregates such as stock-level returns. While being notoriously difficult to measure, taking the role of human attention constraints into account might enable researchers to arrive at a better understanding of actual investor behavior as well as puzzling market phenomena, both of which are hard to reconcile with standard finance theory. Against this background, the goal of this paper is twofold. First, and with a focus on empirical work, it aims at providing a (necessarily selective) review, assessment, and synthesis of the research on limited investor attention. Second, it tries to identify gaps in the literature and to suggest fruitful directions for future research.
- Heiko Jacobs, Sebastian Müller: Anomalies Across the Globe: Once Public, No Longer Existent?. In: Journal of Financial Economics, Vol 2020 No 135, p. 213-230. doi:https://doi.org/10.1016/j.jfineco.2019.06.004Full textCitationAbstractDetails
Motivated by McLean and Pontiff (2016), we study the pre- and post-publication return predictability of 241 cross-sectional anomalies in 39 stock markets. Based on more than two million anomaly country-months, we nd that the United States is the only country with a reliable post-publication decline in long/short returns. Collectively, our meta-analysis of return predictors suggests that barriers to arbitrage trading may create segmented markets and that anomalies tend to represent mispricing rather than data mining.
- Jacobs, Heiko; Hillert, Alexander; Müller, Sebastian: Journalist Disagreement. In: Journal of Financial Markets, Vol 2018 No 41, p. 57-76. doi:10.1016/j.finmar.2018.09.002Full textCitationAbstractDetails
By quantifying the tone of firm-specific articles in leading national newspapers between 1989 and 2010, we propose a bottom-up measure of aggregate journalist disagreement. In line with theoretical considerations, our novel high-frequency proxy for differences of opinion negatively forecasts the market return, in particular during recessions. Moreover, it has predictive power for the cross-section of stock returns. Collectively, our insights support asset pricing theories incorporating belief dispersion and highlight the role of the media in this context.
- Jonas Dorlöchter, Erwin Amann: Risk preferences and economic shocks: Experimental evidence. PDFFull textCitationAbstractDetails
We demonstrate in our experiment that an exogenous shock does not lead to increasing risk aversion, and has ultimately no significant impact on investors’ risk preference in general. To do so, we keep subjects’ risk and return expectations fixed and focus solely on loss in wealth. As a theoretical framework, we use the expected utility approach and take the class of HARA-utility functions to analyse subjects’ preferences. Particularly, our methodical approach affords insights into the impact of economic fluctuations on investors’ risk-taking and the measurement of risk preferences per se. We conclude that cautious investment behavior after an economic crisis might rather be due to changes in the perception of risk and return. Moreover, we give evidence that, in general, it is not sufficient to explain investors’ risk-taking solely by preferences.