On Risks and Opportunities in Financial Markets

Investing in financial securities inevitably involves risks on the one hand and opportunities on the other hand. This thesis bundles four different studies on risks and/or opportunities in financial markets. In one study, we examine the cross-sectional explanatory power of different risk-measures in pricing U.S. stocks and find that investors dislike downside risk. In the second study, we show that conventional short-term reversal strategies exhibit dynamic exposures to systematic risks. Eliminating these risk exposures vastly improves the opportunity to exploit investors’ overreaction exhibited in stock-price movements. Furthermore, this thesis shows that the potential for an ‘active’ manager to add value beyond passively investing in the index is not related to the efficiency of markets. It is, however, positively related to the number of independent investment opportunities, or breadth, available to the active manager. Finally, this thesis provides a study to the behaviour of mutual fund investors subsequent to a replacement of the fund manager. We find that investors perceive turnover of bad performing managers as a bad signal as capital flowing to (withdrawn from) these funds is subsequently lower (higher).

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