Security ownership and asset prices: An analysis of heterogeneous investors

• Applicant: Dr. Stephan Jank
• Subject Area: Accounting and Finance
• Term: from 2014 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 249371597

In financial markets generally only security prices and returns are observed, but it remains unknown who holds a specific security. The newly established Securities Holdings Statistics database of the Deutsche Bundesbank provides the unique opportunity to analyze the ownership structure of securities held in Germany. The objective of this research project is to investigate how investors' security holdings - long as well as short positions - are related to security prices. Whereas general wisdom suggests that financial markets enable participants to share risks, it is less known how exactly risks are shared. For example, which investors are more willing to hold risk and which are less willing to do so? Moreover, how does risk taking and thus the ownership structure of securities change over the business cycle and how does this manifest itself in risk premia? By studying the preferences and holdings of private as well as institutional investors we intend to achieve a better understanding of equity prices and how risk premia are formed in the market. An essential feature of financial markets is that investors can not only own a security (go long), but investors can also sell securities that they do not own (go short). A prevailing assumption in finance models is that investors can short a security at any time - at no or only little costs. The financial crisis of 2008/2009 has shown that short sale constraints are more important than previously thought. These constrains can limit arbitrage and lead to a mis-pricing of assets. In the light of the financial crisis short sales came to the center of the public debate and regulators around the world partly restricted short sales with the aim of stabilizing the financial system. Our aim is to investigate, if and to what degree short sales are de-stabilizing or to what degree they are important to incorporate information and provide liquidity. The holdings data allow us to distinguish between covered short sales, where investors borrow a security before selling, and uncovered/naked short sales, where investors do not borrow the security beforehand. In particular the usefulness of uncovered short sales is controversial. Furthermore, we intend to study whether mistrust among banks has led to a decline in security lending and its implications for short sales and market liquidity.

• DFG Programme: Research Grants