Essays on investor behavior and financial markets

This dissertation consists of three empirical papers on investor behavior and nancial markets. The rst paper ’The Perception of Dependence, Investment Decisions, and Stock Prices’ is joint work with Martin Weber from the University of Mannheim. We nd that the frequency of return comovement (not correlation) drives beliefs and diversi cation decisions in laboratory experiments. Building on our insights from the laboratory, we nd that the frequency of return comovement between stock and market returns is associated with a robust return premium in the cross-section of US stocks. In the second paper ’Stock Returns and the Cross-Section of Investor Attention’, I find that the relation between daily stock returns and investor attention is driven by one dominating effect: Stocks ranked as daily winners and losers experience large spikes in investor attention, whereas non-ranked stocks with extreme returns do not experience any change in attention. I show that this relation is not explained by endogeneity problems, but rather by salient winner and loser rankings in the media. The third paper ’Daily Winners and Losers’ is joint work with Alok Kumar from the University of Miami and Stefan Ruenzi from the University of Mannheim. We find that stocks ranked as daily winners and losers experience buying pressure from retail investors and significant underperformance during the months after the ranking. Excluding low-performance daily winners and losers from the stock universe turns the negative relation between idiosyncratic volatility and returns insignificant, suggesting attention-induced buying pressure for daily winners and losers as the main driver of the idiosyncratic volatility puzzle. The three papers are connected by their focus on investor behavior. Additionally, in ’Daily Winners and Losers’ we build on the insight from ’Stock Returns and the Cross-Section of Investor Attention’ that daily winners and losers experience significant spikes in investor attention