Anlagestrategie Behavioral Finance : die Bedeutung verhaltensorientierter Anlagestrategien in der amerikanischen und deutschen Fondsindustrie

This dissertation investigates empirically the degree of implementation of Behavioral Finance theory in the investment fund industry. In a first step the author identifies the most prominent Behavioral Finance based investment strategies according to academic literature. Then, based on regression analysis, the author examines the extent to which German and U.S. mutual fund managers apply Behavioral Finance based investment strategies, and how great the resulting success is. The findings show that, while their degree of implementation remains low particularly in Germany, Behavioral Finance based investment strategies do, on the whole, have a positive impact on fund performance. The established financial theory builds on efficient markets and rational behavior of market participants. It further postulates that stock prices immediately as well as comprehensively incorporate all available information, and that active asset management cannot sustainably generate positive excess returns. However, extensive empirical research shows that stock prices do not always fully adjust to new relevant information. The relatively recent Behavioral Finance theory addresses in particular the emergence of systematic distortions in asset prices, driven by emotions and cognitive biases. In contrast to the established view, Behavioral Finance theory builds on limited arbitrage and market participants that do not always act rationally. In particular over- and underreaction can cause that asset prices deviate from the fundamentally justified levels in a predictable manner. Hence, active investment strategies that use the insights of Behavioral Finance and exploit systematic market distortions should generate significant excess returns. Measured by the number of pertinent research projects the most important behavioral investment strategies are the momentum, contrarian, and earnings surprise strategies, whose justification is usually directly and almost exclusively associated with the bounded rationality of human decision behavior. On the other hand, the author also includes in the investigations the classic style strategies size and value, even though there is controversy in the pertinent literature as to whether the profitability of these strategies might not also be explicable as justified risk premium in an efficient market setting with rational market participants. The author calculates historical returns for each strategy over the test period 1/1990 to 12/2005. The results show that several strategies generate significant excess returns if applied to the US and German stock market. However, the volatility of strategy returns over time points out that the underlying market inefficiencies are by far not as systematic and predictable as the Behavioral Finance theory suggests. Applying multiple linear regression analysis the author measures the degree of implementation of different sets of behavioral and style strategies within the US and German fund industry. The sample of investigated funds comprises in total 2,778 US American and 111 German actively managed equity funds with a local investment focus. The empirical analysis shows the following results: A small group of US American funds, so called Behavioral Finance funds, explicitly refers to Behavioral Finance in the external communication. As a matter of fact some of these funds apply behavioral investment strategies and generate positive excess returns. Prominent examples are the Fuller & Thaler funds that are grounded in the academic field of Behavioral Finance. Although behavioral strategies represent only a fraction of the overall investment strategy of these funds, results support a positive correlation between degree of implementation of the strategies and fund performance. Thus, applying behavioral as well as style strategies pays out for the managers of (and investors in) selective Behavioral Finance funds. Whereas also the results for the other US funds indicate a certain degree of implementation of style strategies and selective use of behavioral strategies, the German funds analyzed here rarely apply these strategies. The latter rather focus on replicating the overall market index and do that with very limited success. Two possible explanations come to mind that could explain the yet limited degree of implementation of behavioral and style strategies: i) transaction costs that might erase the excess return of a strategy when it comes to practical implementation, and ii) the attempt of fund managers to avoid dissonance that would emerge from a possible negative deviation from market return. Complementary analysis shows that excess returns of selective investment strategies remain significant when accounting for transaction costs. The possibility of dissonance avoidance is not assessed in further detail, but could mark a starting point for future research in this field.