KAREHNKE Paul

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This thesis consists of three papers. The first two papers study information flows in financial markets, and the third paper studies how mutual fund families can use relatively discretionary revenue streams to channel profits to specific funds within the family. The first paper, co-authored with Daniel Schmidt, studies price and liquidity spillovers in financial markets. Using a quasi-natural experiment, we show that investors observe stock prices to extract signals, and use them to make trades. In the second paper, I show that investment funds acquire information through the securities lending market. I show that active mutual funds sell stocks borrowed from them by short sellers, while index funds-which are prohibited from trading-do not. On the other hand, index funds are able to charge higher stock lending fees to borrowers. I attribute this to the fact that they are better lenders in the sense that they cannot use the information they get to trade, and thus profit from the information of short sellers. The third paper, also with Daniel Schmidt, studies the policies of fund families in allocating securities lending and lending income among member funds. We show that fund families deviate from the claimed fair allocation, directing more securities lending and loan profits to index funds. This finding is consistent with funds substituting lower management fees with higher securities lending income.

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We study the effects of the presence of a negative stereotype on the formation of self-confidence and on decision-making in achievement-related situations. We take into account not only consumption utility but also psychological utility (ex-ante ego utility and ex-post disappointment/elation). We show that any stereotype of lower ability (in the form of biased interpretation of success and failure in terms of ability) leads to gaps in confidence, in participation in risky/ambitious options and in performance. Furthermore, we show how the stereotype survives and even gets reinforced. Considering gender and mathematics, we are able to explain the lower self-confidence of girls in mathematics, their underrepresentation in STEM fields, as well as their choices of less ambitious options and lower performance.

This thesis studies portfolio choice and asset pricing with preferences that go beyond standard expectation-utility and mean-variance preferences. The first part of this thesis focuses on a decision model in which the decision maker forms endogenous beliefs given his expectation utility and hindsight deception. The implications of the model for portfolio choice and asset pricing are derived and compared to the implications of the standard utility expectation model. The second part of this thesis focuses on investors who derive the utility of the first three moments of their portfolio returns. We derive and test the conditions under which additional assets can improve the investment universe of investors with mean-variance-skewness preferences. The implications of these preferences for equilibrium asset returns are then analyzed and tested with stock market returns.

We revisit the model proposed by Gollier and Muermann (see Gollier, C. and A. Muermann, 2010, Optimal choice and beliefs with exante savoring and ex-post disappointment, Management Sci., 56, 1272-1284, hereafter GM). In GM, for a given lottery, agents form anticipated expected payoffs and the set of possible anticipations is assumed to be exogenously fixed. We rather propose sets of possible anticipations which are endogenously determined. This permits to compare and evaluate in a consistent manner lotteries with different supports and to revisit the portfolio choice problem. We obtain new conclusions and interesting insights. Our extended model can rationalize a variety of empirically observed puzzles like a positive demand for assets with negative expected returns, preference for skewed returns and under-diversification of portfolios.