• The seminar places will be allocated in one application round. The allocation is done manually, the time of application (within one application round) is not important. As criteria, we take into account both grades and previous knowledge in the area in Finance (from lectures, seminars, etc.). In addition, we also take into account the priority of the application as stated in the wiwi portal.
• When applying, you have the possibility to indicate your desired topics. We will try to take your preferences into account as far as possible. The final allocation of topics will only be communicated after the second application round has been completed.
• Please note that we consider the acceptance of an allocated seminar place via the wiwi portal as a binding registration for the seminar. After that, a withdrawal from the seminar is only possible in justified exceptional cases after prior consultation.
• As an official start of the seminar we will hold a joint kick-off.
• Relevant for grading are an individual thesis and a group presentation in a block seminar.

Content of the seminar:

Behavioral biases exert a profound impact on individuals' investment decisions, often swaying choices away from rational and optimal paths. Emotional responses, such as fear or greed, can lead to impulsive actions, causing investors to buy or sell based on short-term sentiments rather than a thorough analysis of market fundamentals. A large variety of these biases have been shown in experiments and in portfolio data of individual investors. They are known to prevent individuals from making timely adjustments to their portfolios, leading to an overall underperformance. From a broader perspective, suboptimal investment decisions may drive prices of financial assets away from their rational counterparts. Recognizing and mitigating these behavioral biases is essential for fostering a more objective and strategic approach to investment and to fairer and more informative prices. In this seminar, we want to review and discuss some of the most prominent behavioral biases and discuss their impact.

Deliverables:

The seminar language is English. Every participant has to hand in a seminar thesis of 12-15 pages, written in English. The main goal is to thoroughly describe the behavioral bias, referring to the pertinent academic literature. Taking this as a starting point, students can either a) shed light on the consequences of the bias in financial decision making for financial markets as a whole (again using existing studies in the literature) or b) run their own experiment (small scale, with fellow students as participants).  After about half of the semester (see schedule below), there is a status update-meeting with the whole group, where participants are supposed to share their plans for their seminar theses and presentation and a rough roadmap for the remaining semester. At the end of the semester, all participants present their main results (in English!) and we discuss their findings with the group. The final grade will depend on the thesis, the presentation, and the participation in the discussions in the two meetings (status update and presentations).

Individual topics:

• 1. Overconfidence
• 2. Prospect theory
• 3. Disappointment aversion
• 4. Ambiguity aversion
• 5. Mental accounting
• 6. Framing

Schedule:

• Feb.04, 2024, 23:59 Application deadline first round
• Mar.17, 2024, 23:59 Application deadline second round
• Apr.15, 2024, 16:00 Kick-off meeting and assignment of topics
• May.27, 2024, 16:00 Status update-meeting
• Jul.08, 2024, 23:59 Deadline for handing in the seminar theses
• Jul.15, 2024, 14:00 Presentations

 Reaching out:

There are neither fixed dates for nor a maximum number of meetings with the supervisors. If you have any questions, please feel free to arrange a meeting by e-mailing us at

• Julian Thimme (thimme∂kit.edu)
• Fanchen Meng (fanchen.meng∂kit.edu)

Content of the seminar:

The equity premium puzzle is a longstanding and perplexing phenomenon in the field of finance. It revolves around the apparent disconnect between the expected returns on stocks and the risk-free interest rate. Asset pricing theories imply that investors demand an equity risk premium, that means, a higher return for taking on the additional risk associated with investing in stocks compared to the risk-free rate offered by assets like government bonds. The puzzle arises from the magnitude of this premium. Empirical evidence over many decades has shown that stocks have historically provided significantly higher returns than could be justified by standard financial models. These models predict that the equity risk premium should be relatively small, because stock market returns are only weakly correlated with macroeconomic fundamentals, especially household consumption. The key question is: Why are stock returns so high, given that they barely affect the overall financial well-being of investors? Researchers and economists have proposed various explanations for the equity premium puzzle. Some argue that investors may be excessively risk-averse, while others suggest that the true risks are underestimated by financial economists. The goal of this seminar is to shed light on a variety of potential explanations and discuss their main economic intuitions. Resolving the equity premium puzzle is not only a theoretical challenge but also has significant implications for investment strategies, portfolio management, and understanding the dynamics of financial markets. Researchers continue to explore this intriguing phenomenon in their quest for a comprehensive explanation that can bridge the gap between theory and empirical observations in asset pricing. In that sense, the seminar provides insights into cutting-edge research in financial economics.

Deliverables:

The seminar language is English. Every participant has to hand in a seminar thesis of 12-15 pages, written in English. The main goal is to thoroughly describe the economic rationale behind the chosen article. Taking this as a starting point, the thesis can either a) outline criticisms of the presented model (using the follow-up literature) or b) shed light on the model’s (or some model extensions’) ability to explain other phenomena in asset pricing. After about half of the semester (see schedule below), there is a status update-meeting with the whole group, where participants are supposed to share their plans for their seminar theses and presentation and a rough roadmap for the remaining semester. At the end of the semester, all participants present their main results (in English!) and we discuss similarities and differences across the alternative economic models. The final grade will depend on the thesis, the presentation, and the participation in the discussions in the two meetings (status update and presentations).

Individual topics:

• 1. Long-run risk (main article: Bansal and Yaron (2004)) The long-run risks model posits that the economy faces persistent and unpredictable shocks that affect future consumption growth, representing a source of long-run risk. Investors are assumed to be concerned about these economic risks and demand a risk premium in compensation for bearing them. The model’s key innovation is its focus on fluctuations in long-term risk, rather than the local correlation between stock returns and household consumption.
• 2. Habit formation (main article: Campbell and Cochrane (1999)) The main idea of this framework is that the preferences of investors incorporate so called habit formation. This means that investors derive utility not only from their current consumption but also from the deviation of consumption from a habit or target level. When consumers are accustomed to a certain standard of living, they experience disutility if their consumption falls below this habit level. This effectively makes them excessively risk averse, explaining the high risk premia on stocks.
• 3. Rare disasters (main article: Barro (2006)) The model posits that there is a small but nonzero probability of catastrophic events occurring, which can lead to massive economic losses and wealth destruction. Investors are assumed to be highly concerned about these rare disasters. They demand a substantial risk premium for holding assets that are vulnerable to such events. It is argued that the feared disaster has not occurred (at least in the USA), so that asset returns seem surprisingly high while fundamentals are surprisingly smooth.
• 4. Intermediary frictions (main article: He and Krishnamurthy (2013)) The intermediary asset pricing model emphasizes the role of financial intermediaries, such as banks and shadow banks, in the economy. It suggests that asset prices are influenced not only by the behavior of households but also by these institutions. When they are under stress and face regulatory constraints, they reduce their exposures to risky assets, leading to higher stock returns.

Literature:

 Besides the four papers mentioned above, there are several follow-up papers with refinements of the original economic ideas. A part of the work is to find these follow-up papers, for example by using google scholar.

The paper by Mehra and Prescott (1985) provided the first thorough description of the equity premium puzzle.

The main articles are :

• Bansal, R., and A. Yaron, 2004, Risks for the long-run: A potential resolution of asset pricing puzzles, Journal of Finance 59, 1481–1509.
• Barro, Robert J, 2006, Rare disasters and asset markets in the twentieth century, Quarterly Journal of Economics 121, 823–866.
• Campbell, John Y, and John H Cochrane, 1999, By force of habit: A consumption-based explanation of aggregate stock market behavior, Journal of Political Economy 107, 205–251.
• He, Zhiguo, and Arvind Krishnamurthy, 2013, Intermediary asset pricing, American Economic Review 103, 732–770.
• Mehra, R., and E. Prescott, 1985, The equity premium: A puzzle, Journal of Monetary Economics 15, 145–161.

Schedule:

• Oct 08, 2023, 23:59 Application deadline
• Oct 23, 2023, 16:00 Kick-off meeting and assignment of topics
• Dec 11, 2023, 16:00 Status update-meeting
• Jan 29, 2024, 23:59 Deadline for handing in the seminar theses
• Feb 05, 2024, 14:00 Presentations

 Reaching out:

There are neither fixed dates for nor a maximum number of meetings with the supervisors. If you have any questions, please feel free to arrange a meeting by e-mailing us at

• Julian Thimme (thimme ∂does-not-exist.kit edu)
• Viktoria Klaus (viktoria klaus ∂does-not-exist.kit edu)
• Fanchen Meng (fanchen.meng∂kit.edu)

"Economists have recently been increasingly focusing on the study of financial crises - and for good reason. As the global financial crisis unfolded in 2008, the profession, as well as the whole world, was reminded of the significance of these events in terms of the historical tendency of financial crises to recur over time, their ability to affect both rich and poor countries, and the deep and lasting damage they can inflict on economies, societies, and states" (cited from Sufi and Taylor (2021): Financial Crises: A Survey, Working Paper). In this seminar, you will examine various financial crises of the past 100 years, exploring their causes, developments, and the effectiveness of the measures taken.

Topics:

• Great Depression 1929
• Mexican Peso Crisis 1994
• Asian Financial Crisis 1997
• Dot Com Crisis 2001
• Global Financial Crisis 2008
• EURO Debt Crisis 2010
• COVID Crisis 2020

"The intersection between finance and technology, known as fintech, has led to a dramatic growth of innovations and changed the landscape of financial markets. While fintech plays a crucial role in democratizing access to credit for non-bank customers and consumers with thin credit histories worldwide, consumers who are currently well served by traditional banking services are also turning to fintech companies for faster services and greater transparency. Fintech, particularly blockchain, has the potential to be disruptive to financial systems and intermediation" (cited from Allen/Gu/Jagtiani (2020), A Survey of Fintech Research and Policy Discussion, Working Paper). This seminar deals with the major developments in modern financial markets, including cryptocurrencies, crowdinvesting, initial coin offerings, security tokenization, social trading, and robo-advisors.

Topics:

• Traditional Money Creation vs. Cryptocurrencies
• Bank Lending vs. Crowdinvesting
• IPOs vs. ICOs
• Centralized Trading vs. Security Tokenization
• (International) Payment Processing by Banks vs. Peer-to-Peer
• Investment Advisory vs. Social Trading and Robo-Advisors

Active investors try to identify stocks that should be bought or sold at specific times in order to achieve the highest possible portfolio return. In recent years, researchers and investors have identified numerous stock-specific signals and characteristics that can be helpful when picking stocks. In this seminar, we will focus on signals based on past stock performance. A well-known example is the "momentum" of a stock, i.e. the return over the past twelve months. We will implement different strategies to get an own impression of the profitability of the strategies and possible economic explanations.

Topics:

• Volatility (total volatility and idiosyncratic volatility)
• Momentum (momentum and calendar momentum)
• Reversal (short-term and long-term reversal)
• Market risk (Beta and coskewness)
• Return patterns (lottery characteristics and streaks)