Charles Favreau, PhD
Assistant Professor | Duquesne University
Research Statement
Do Peer Effects Influence Portfolio Choice? Evidence from 401(k) allocations
Job Market Paper
Committee
- Richard Sias (Chair), Aazam Virani, Mihai Ion, Keisuke Hirano
Abstract
Financial researchers agree that allocating money to employer stock in a 401(k) plan is a poor strategy, yet many employees do so. Not only does this investment strategy bear unrewarded idiosyncratic risk, but it also correlates employees' retirement portfolios with their human capital. I find evidence that this selection is influenced by the investment preferences of peers, which includes both management at the firm and employees at other firms headquartered in the same city. Specifically, the percentage allocated to company stock by employees in the 401(k) plan is positively related to both the net open-market purchases of company stock by management and the average allocation to company stock in 401(k) plans by employees at other firms headquartered in the same city. Surprisingly, the allocation to company stock in 401(k) plans increases with investment in employee stock ownership plans (ESOPs), which are a dominant substitute since they often offer stock at a discount. Lastly, I provide additional support for the peer effects hypothesis through interaction tests. The relationship between employees and management is influenced by geographic dispersion and trust within the firm - two factors that alter group cohesion and, in turn, the effect of peer influence.
Disposition and Prospect Theory: Evidence from Insider Trading
Abstract
While most researchers agree on the existence of disposition, there still remains question regarding its cause. In this study, I investigate whether prospect theory is a potential cause by observing levels of disposition among insiders relative to information and risk. I find that while disposition increases for more volatile stocks, the increase is due strictly to an increase in the proportion of gains realized, and not in the decrease of the proportion of losses realized as well. This finding is inconsistent with the disjoint utility curve described by prospect theory, which implies risk seeking preferences for losses. Furthermore, I find that disposition doesn't decrease with superior information, a finding also inconsistent with prospect theory. Lastly, I find that disposition does decrease with financial sophistication, and that the belief in mean reversion does appear to contribute to the disposition effect, but not fully explain it.
Presented
- Financial Management Association - Fall 2015
- Southern Finance Association - Fall 2015
- University of Arizona - Fall 2014
The Performance of Hedge Fund ETFs (with Hayden Kane and Austin Shelton)
Abstract
Exchange traded funds (ETFs) are increasingly important financial products which have experienced phenomenal growth over the past decade. In the past six years an appealing new type of ETF has been developed and grown greatly in assets under management and popularity; the Hedge Fund ETF. Hedge Fund ETFs are intriguing vehicles as they allow retail investors an opportunity to track various hedge fund strategies. In this paper we compare the historical performance of Hedge Fund ETFs to their relevant hedge fund benchmarks. We show that Hedge Fund ETFs broadly underperform relevant hedge fund benchmarks. A value-weighted portfolio of Hedge Fund ETFs posts a statistically significant -324 bp a year Fama-French Carhart alpha, and underperforms an aggregate hedge fund index by 571 bp a year in raw terms. In addition, we show that the returns of a dynamic S&P 500, T-bill replicating strategy dominate those of a value-weighted Hedge Fund ETF. Finally, Hedge Fund ETF strategy portfolios post negative alphas for all strategies identified. These results suggest that investment in hedge fund ETFs in lieu of hedge funds may be detrimental to one’s wealth.