Doctoral thesis

Frictions, behavioral biases and active portfolio management


136 p

Thèse de doctorat: Università della Svizzera italiana, 2014

English The three chapters of this thesis contribute to the following research questions: (i) What is the role of agency frictions for the performance of mutual funds? (ii) What is the role of market frictions for the performance of hedge funds? (iii) Do hedge funds profit from the behavioral biases of other market participants? The first chapter of this thesis comprises the article "Are Star Funds really Shining? Cross-trading and Performance Shifting in Mutual Fund Families", which is joint work with my colleagues Tamara Nefedova and Gianpaolo Parise. This article exploits institutional trade level data to study cross-trading activity inside mutual fund families and to answer the question whether cross-trades are used to smooth or to shift performance inside the fund family. The second chapter comprises the solo-authored article "Beta Arbitrage and Hedge Fund Returns". This article finds that a factor capturing the returns of strategies exploiting the low beta anomaly, i.e. a betting-against-beta factor (BAB), has significant explanatory power in the time-series and cross-section of hedge fund returns. The third chapter comprises the solo-authored article " Behavioral Factors in Risk Arbitrage". In the context of takeovers, the article examines the trading behavior of investors around a salient reference point, the 52-week high, and its effect on asset prices. Using a large sample of institutional trade-level data the article documents a 50% increase in institutional investor exit at the announcement date for offer prices exceeding the 52-week high. The increased selling pressure leads to significant stock price underreaction and explains a large part of the returns in risk arbitrage.
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