References of "Lehnert, Thorsten 50002191"
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See detailA Note on Stein’s Overreaction Puzzle
Lin, Yuehao; Lehnert, Thorsten UL

in Decisions in Economics and Finance (2020), 43(1), 269-276

Recently, Christoffersen et al. (2013) argue that the overreaction puzzle of Stein (1989) can be explained by a variance-dependent pricing kernel. In this note, we challenge this view. Our theoretical ... [more ▼]

Recently, Christoffersen et al. (2013) argue that the overreaction puzzle of Stein (1989) can be explained by a variance-dependent pricing kernel. In this note, we challenge this view. Our theoretical results are in line with their argument that the variance under risk-neutral measure is more persistent than the variance under physical measure due to a negative variance risk premium. But our results do not support their argument that the more persistent variance is able to qualitatively explain Stein’s findings. We show theoretically that the persistence of the volatility cannot amplify the movements of long-term variance to short-term fluctuations in variance, and, therefore, conclude that Stein’s overreaction puzzle is still unsolved. [less ▲]

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See detailFear and Stock Price Bubbles
Lehnert, Thorsten UL

in PLoS ONE (2020), 15 (5)(e0233024), 1-11

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See detailThe Lehman Sisters Claim
Lehnert, Thorsten UL

E-print/Working paper (2020)

I evaluate Christine Lagarde´s claim that more female leaders can be associated with more prudence, and less of the risky decision-making that had provoked the crisis. Indeed, the proportion of women who ... [more ▼]

I evaluate Christine Lagarde´s claim that more female leaders can be associated with more prudence, and less of the risky decision-making that had provoked the crisis. Indeed, the proportion of women who are employed in decision-making and management roles in governments, large enterprises and institutions varies substantially across European countries and is oftentimes below 30%. Research suggests that in addition to biological differences, men and women show morphological dissimilarities in specific brain regions, which explain the observed differences in behavior. As a result, female decision makers tend to be more risk averse, better suited to carefully analyze a problem, superior in multitasking and better in creating solutions that work for a group. Not surprisingly, firms with more female decision makers tend to outperform their peers in terms of productivity, profitability and stock performance while taking fewer risks. In this paper, I aim to explore the effect of female decision making on aggregate equity returns. Relying on an equilibrium asset-pricing model in an economy under jump diffusion, I decompose the moments of the returns of European stock market indices into a diffusive (systematic) risk and an (idiosyncratic) extreme event risk part. For a balanced panel of European countries, I find empirical evidence for a Lehman sisters’ effect: female decision making is an important determinant of (idiosyncratic) extreme event risk. As a result, stock markets in countries with more female decision makers are characterized by higher risk aversion, lower volatility and more positive return asymmetry, primarily driven by extreme event risk, e.g. the lower frequency of negative jumps. Results are robust to the inclusion of various controls for other country- or market-specific characteristics. [less ▲]

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See detailIs Risk-Neutral Skewness an Indicator of Jump Risk? Evidence from Tail Risk-Taking of Hedge Funds
Lehnert, Thorsten UL

E-print/Working paper (2020)

Research suggests that systematic tail risk affects the cross-sectional variation in hedge fund returns. Fund’s tail risk is mainly induced by its investments in more tail-sensitive stocks and is ... [more ▼]

Research suggests that systematic tail risk affects the cross-sectional variation in hedge fund returns. Fund’s tail risk is mainly induced by its investments in more tail-sensitive stocks and is positively related to a trading strategy of writing out-of-the-money put options on the equity market index. Hence, high tail risk hedge funds are exposed to higher moments risks; they sell market volatility risk and buy market skewness risk. The relationship between the return spread of a high minus low tail risk strategy and a market volatility factor is expected to be negative and empirically observed to be negative. However, the relationship between a tail risk strategy and a market skewness factor is expected to be positive but I find it to be negative. In this paper, I explore this puzzling result. Using equity-oriented hedge fund return data, I find that equity market skewness risk explains a major part of variations in hedge funds’ tail risk. My results suggest that the observed negative relationship relates to the problem of price pressure associated with “crowded trades” of mutual funds. Given that retail investors are prone to herding, the directional trading of mutual funds is correlated, and their collective actions can generate short-term price pressure on aggregate stock prices (price ‘noise’). Short sellers systematically exploit these patterns not only in the equity lending market, but also in the options market by moving in the opposite direction. Hence, in times when investors shift their funds from bond to equity mutual funds, short selling in the options market, the non-fundamental demand for index put options, induces a negative relationship between risk-neutral market skewness and returns. Accordingly, the long leg of the tail risk strategy appears to be negatively exposed to market skewness risk, which is in contrast to the usual interpretation of option-implied skewness as an indicator of jump risk. My results are in line with empirical evidence that suggests that the shape of the implied volatility curve is attributable to the demand pressure of specific option series and a limited ability of arbitrageurs to bring prices back into alignment. [less ▲]

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See detailRetail Investors' Flight-To-Risk
Lehnert, Thorsten UL

E-print/Working paper (2020)

Previous research suggests that the cross-section of stock returns has substantial exposure to risks captured by higher moments in market returns. In particular, the market skewness risk premium is ... [more ▼]

Previous research suggests that the cross-section of stock returns has substantial exposure to risks captured by higher moments in market returns. In particular, the market skewness risk premium is negative, statistically and economically significant, and cannot be explained by other common risk factors or firm characteristics. This is somewhat counterintuitive when one considers the usual interpretation of e.g. option-implied skewness as an indicator of jump risk or downside risk in the stock market. I find that price pressure associated with “crowded trades” of mutual funds is partly explaining the observed negative price of market skewness risk. Given that retail investors are prone to herding, the directional trading of mutual funds is correlated, and their collective actions can generate short-term price pressure on aggregate stock prices. Short sellers systematically exploit these patterns not only in the equity lending market, but also in the options market by moving in the opposite direction. Therefore, during flight-to-risk (FTR) episodes, when equity funds experience inflows and market prices are contaminated by ‘noise’, negative shifts in market skewness are due to short selling and do not necessarily reflect market participants’ fear about increased downside risk in the stock market. Therefore, stocks with a negative past skewness exposure perform well, because they positively correlate with the ‘noise’ component. As a result, while the expected market skewness risk premium is positive, the observed one is on average negative. I find that, firstly, net exchanges of equity funds are affecting the cross-section of stock returns, leading to a significant negative market skewness risk premium. Secondly, while the volatility risk premium appears to vary over time, the skewness risk premium is found to be constant. Thirdly, in line with my hypothesis, the market skewness risk premium is only significantly negative in months when retail investors transfer their money from bond funds to equity funds. Various robustness checks confirm the validity of the results. My findings also suggest that price ‘noise’ induced by uninformed trading is not vanished at the aggregate level. [less ▲]

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See detailWhy is the Market Skewness-Return Relationship Negative?
Lehnert, Thorsten UL

Scientific Conference (2020, January 23)

The observed negative relationship between market skewness and excess return or the negative price of market skewness risk in the cross-section of stock returns is somewhat counterintuitive when we ... [more ▼]

The observed negative relationship between market skewness and excess return or the negative price of market skewness risk in the cross-section of stock returns is somewhat counterintuitive when we consider the usual interpretation of e.g. option-implied skewness as an indicator of jump risk or downside risk. One possible explanation for this inconsistency is that there are factors affecting option-implied market skewness other than jump risk in the stock market. In this paper, I find that price pressure associated with “crowded trades” of mutual funds is an important endogenous factor. Given that retail investors are prone to herding, the directional trading of mutual funds is correlated, and their collective actions can generate short-term price pressure on aggregate stock prices. Short sellers systematically exploit these patterns not only in the equity lending market, but also in the options market. In line with this economic channel, I find that firstly, the significant negative relationship between market skewness and returns becomes insignificant, once I control for price pressure. Secondly, the negative relationship is only present for the “bad” downside component of risk-neutral skewness, associated with out-of-the-money put options. For the “good” upside component of risk-neutral skewness, associated with out-of-the-money call options, the relationship is always positive. Thirdly, price pressure affects the skewness-return relationship, which can be clearly distinguished from the impact of flows on the volatility-return relationship in terms of the leverage effect. [less ▲]

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See detailModel Uncertainty and Pricing Performance in Option Valuation
Bams, Dennis; Blanchard, Gildas; Lehnert, Thorsten UL

in The Journal of Derivatives (2020), 27(3), 31-49

The objective of this paper is to evaluate option pricing model performance at the cross sectional level. For this purpose, we propose a statistical framework, in which we in particular account for the ... [more ▼]

The objective of this paper is to evaluate option pricing model performance at the cross sectional level. For this purpose, we propose a statistical framework, in which we in particular account for the uncertainty associated with the reported pricing performance. Instead of a single figure, we determine an entire probability distribution function for the loss function that is used to measure option pricing model performance. This methodology enables us to visualize the effect of parameter uncertainty on the reported pricing performance. Using a data driven approach, we confirm previous evidence that standard volatility models with clustering and leverage effects are sufficient for the option pricing purpose. In addition, we demonstrate that there is short-term persistence but long-term heterogeneity in cross-sectional option pricing information. This finding has two important implications. First, it justifies the practitioner’s routine to refrain from time series approaches, and instead estimate option pricing models on a cross-section by cross-section basis. Second, the long term heterogeneity in option prices pinpoints the importance of measuring, comparing and testing option pricing model for each cross-section separately. To our knowledge no statistical testing framework has been applied to a single cross-section of option prices before. We propose a methodology that addresses this need. The proposed framework can be applied to a broad set of models and data. In the empirical part of the paper, we show by means of example, an application that uses a discrete time volatility model on S&P 500 index options. [less ▲]

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See detailIslamic Banking and Economic Growth
Kchouri, Bilal; Lehnert, Thorsten UL

in Rafay, Abdul (Ed.) Handbook of Research on Theory and Practice of Global Islamic Finance (2020)

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See detailWhy is the Market Skewness-Return Relationship Negative?
Lehnert, Thorsten UL

Scientific Conference (2019, December 13)

The observed negative relationship between market skewness and excess return or the negative price of market skewness risk in the cross-section of stock returns is somewhat counterintuitive when we ... [more ▼]

The observed negative relationship between market skewness and excess return or the negative price of market skewness risk in the cross-section of stock returns is somewhat counterintuitive when we consider the usual interpretation of e.g. option-implied skewness as an indicator of jump risk or downside risk. One possible explanation for this inconsistency is that there are factors affecting option-implied market skewness other than jump risk in the stock market. In this paper, I find that price pressure associated with “crowded trades” of mutual funds is an important endogenous factor. Given that retail investors are prone to herding, the directional trading of mutual funds is correlated, and their collective actions can generate short-term price pressure on aggregate stock prices. Short sellers systematically exploit these patterns not only in the equity lending market, but also in the options market. In line with this economic channel, I find that firstly, the significant negative relationship between market skewness and returns becomes insignificant, once I control for price pressure. Secondly, the negative relationship is only present for the “bad” downside component of risk-neutral skewness, associated with out-of-the-money put options. For the “good” upside component of risk-neutral skewness, associated with out-of-the-money call options, the relationship is always positive. Thirdly, price pressure affects the skewness-return relationship, which can be clearly distinguished from the impact of flows on the volatility-return relationship in terms of the leverage effect. [less ▲]

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See detailTHE MARKET SKEWNESS-RETURN RELATIONSHIP
Lehnert, Thorsten UL

Presentation (2019, October 29)

The observed negative relationship between market skewness and excess return or the negative price of market skewness risk in the cross-section of stock returns is somewhat counterintuitive when we ... [more ▼]

The observed negative relationship between market skewness and excess return or the negative price of market skewness risk in the cross-section of stock returns is somewhat counterintuitive when we consider the usual interpretation of e.g. option-implied skewness as an indicator of jump risk or downside risk. One possible explanation for this inconsistency is that there are factors affecting option-implied market skewness other than jump risk in the stock market. In this paper, I find that price pressure associated with “crowded trades” of mutual funds is an important endogenous factor. Given that retail investors are prone to herding, the directional trading of mutual funds is correlated, and their collective actions can generate short-term price pressure on aggregate stock prices. Short sellers systematically exploit these patterns not only in the equity lending market, but also in the options market. In line with this economic channel, I find that firstly, the significant negative relationship between market skewness and returns becomes insignificant, once I control for price pressure. Secondly, the negative relationship is only present for the “bad” downside component of risk-neutral skewness, associated with out-of-the-money put options. For the “good” upside component of risk-neutral skewness, associated with out-of-the-money call options, the relationship is always positive. Thirdly, price pressure affects the skewness-return relationship, which can be clearly distinguished from the impact of flows on the volatility-return relationship in terms of the leverage effect. [less ▲]

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See detailTHE MARKET SKEWNESS-RETURN RELATIONSHIP, Plenary Talk
Lehnert, Thorsten UL

Scientific Conference (2019, September 25)

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See detailFear and Euphoria
Lehnert, Thorsten UL

Scientific Conference (2019, August 28)

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See detailWHY IS THE MARKET SKEWNESS-RETURN RELATIONSHIP NEGATIVE?
Lehnert, Thorsten UL

Scientific Conference (2019, July 09)

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See detailWHY IS THE MARKET SKEWNESS-RETURN RELATIONSHIP NEGATIVE?
Lehnert, Thorsten UL

E-print/Working paper (2019)

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See detailWHY IS THE MARKET SKEWNESS-RETURN RELATIONSHIP NEGATIVE?
Lehnert, Thorsten UL

Scientific Conference (2019, May 30)

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See detailSkewness Risk Premium: Theory and Empirical Evidence
Lin, Yuehao; Lehnert, Thorsten UL; Wolff, Christian UL

in International Review of Financial Analysis (2019), 63

Using an equilibrium asset and option pricing model in a simple economy under jump diffusion, we show theoretically that the aggregated excess market returns can be predicted by the skewness risk premium ... [more ▼]

Using an equilibrium asset and option pricing model in a simple economy under jump diffusion, we show theoretically that the aggregated excess market returns can be predicted by the skewness risk premium, which is constructed to be the difference between the physical and the risk-neutral skewness. In an empirical application of the model using more than 20 years of data on S&P500 index options, we find that, in line with theory, risk-averse investors demand risk-compensation for holding stocks when the market skewness risk premium is high. However, when we characterize periods of high and low risk aversion, we show that in line with theory, the relationship only holds when risk aversion is high. In periods of low risk aversion, investors demand lower risk compensation, thus substantially weakening the skewness-risk-premium-return trade off. [less ▲]

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See detailEnergy Systemic Risk
Decet, Romain; Lehnert, Thorsten UL

Scientific Conference (2019, April 06)

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See detailAsset Pricing Implications of Good Governance
Lehnert, Thorsten UL

in PLoS ONE (2019), 14 (4)(e0214930), 1-14

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See detailBig Moves of Mutual Funds
Lehnert, Thorsten UL

in Eurasian Economic Review (2019), 9(1), 1-27

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See detailCorporate Governance and Skewness in Stock Returns
Berglund, Tom; Lehnert, Thorsten UL; Rolle, Gudrun

E-print/Working paper (2019)

This paper analyzes the relationship between corporate governance and idiosyncratic skewness of stock returns. We test this hypothesis by analyzing the impact of external as well as internal governance ... [more ▼]

This paper analyzes the relationship between corporate governance and idiosyncratic skewness of stock returns. We test this hypothesis by analyzing the impact of external as well as internal governance provisions, and are thus able to provide an overall understanding of the relationship between governance and firm-specific return asymmetries. Our results show that better governance leads to a reduction in idiosyncratic skewness in relatively non-competitive industries. In relatively competitive industries, governance has less to no impact on firm-specific return skewness. Furthermore, an overall increase in transparency, quality and disclosure of information, proxied through the Sarbanes Oxley Act, reduces relative idiosyncratic skewness. Our findings can be regarded as detrimental for shareholders, who have a preference for positive idiosyncratic skewness. The evidence contributes to a debate, which suggests that – at the end of the day – an act like Sarbanes-Oxley, which was intended to protect shareholders from accounting errors and frauds and to improve the accuracy of corporate disclosures, comes at the expenses of shareholders. The reduction of idiosyncratic skewness through better governance collides with shareholder’s preference for idiosyncratic and positively skewed stock returns, which present a lottery like upside option of monetary gains and value creation through the right tail. This side effect of governance is also in line with the literature that highlights potential costs of corporate governance. [less ▲]

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