Presenters: Lieske Coumans, Tilburg University and Steffen Meyer, Aarhus University

Lieske Coumans:

Title: Robust hedging of terminal wealth under interest rate risk with the constraint approach

Abstract: Long-term investors hedge their liabilities against nominal interest rate risk by bond investments. However, the optimal bond allocations are very sensitive for the underlying parameters. As a result, an investor who does not consider parameter uncertainty may face a large loss in utility, especially when she is very risk averse. Therefore, we consider a robust investor with a max-min objective function who takes into account parameter uncertainty. We apply the constraint approach to limit the considered entropy around either the market price of risk parameter or the mean-reversion parameter. If she considers uncertainty around the market price of risk, she should decrease her robust investment until it reaches either zero or until the entropy constraint is satisfied. If the investor considers uncertainty around the mean-reversion parameter, we show that this problem is hard to solve analytically. As an alternative, we show numerical results of the impact on the investor's utility of terminal wealth because of distortions in the mean-reversion parameter.

Steffen Meyer:

Title: Fresh Air Eases Work – The Effect of Air Quality on Individual Investor Activity

Abstract: This paper shows that air quality has a significantly negative effect on the likelihood of individual investors to sit down, log in, and trade in their brokerage accounts controlling for investor-, weather-, traffic-, and market-specific factors. In perspective, a one standard deviation increase in fine particulate matter leads to a 9% reduction in the probability of logging in and trading, which is larger than the reduction due to a one standard deviation increase in sunshine. We then argue that levels of pollution that are commonly found throughout the developed world affect cognitive performance, which, in turn, affects the probability to log in and trade, a cognitively-demanding task. To our knowledge, this is the first study to demonstrate a negative impact of pollution in the domain of individual management of household finances in a developed economy.

Organizers: Stefan Hirth and Anders Merrild Posselt