{"id":915,"date":"2022-06-27T15:40:41","date_gmt":"2022-06-27T15:40:41","guid":{"rendered":"https:\/\/website.prod.unilu.spikeseed.cloud\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/"},"modified":"2022-06-27T15:40:41","modified_gmt":"2022-06-27T15:40:41","slug":"how-stock-market-inefficiencies-can-affect-the-real-economy","status":"publish","type":"news","link":"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/","title":{"rendered":"How stock market inefficiencies can affect the real economy"},"content":{"rendered":"<section class=\"wp-block-unilux-blocks-free-section section\"><div class=\"container xl:max-w-screen-xl\"><p>Corporate managers\u2019 investment behaviour is affected by waves of investor optimism and pessimism. Hence, the performance of an investment factor can be predicted. A dynamic trading strategy that is based on signals from past flows between bond and equity mutual funds and the investment factor generates a significant annual alpha of 7%.<\/p><p>Mutual fund investors are known to be vulnerable to fluctuating market conditions. What is less well understood is how corporate managers are affected by waves of investor optimism. A Luxembourgish researcher has published a study in the SpringerNature journal \u2018Financial Innovation\u2019, where he argues that corporate managers and investors are jointly caught up in market euphoria. Using a long time series of aggregate flows in and out of bond and equity mutual funds as a proxy for investor sentiment, the study&#8217;s author, <a href=\"https:\/\/wwwen.uni.lu\/recherche\/fdef\/df\/people\/thorsten_lehnert\" target=\"_self\" title=\"\" rel=\"noopener\">Thorsten Lehnert<\/a>, professor at the University of Luxembourg&#8217;s Department of Finance shows that the joint \u201cmoodiness\u201d of managers and investors can predict the performance of an investment strategy that relies on differences in corporate managers\u2019 investment behaviour.<\/p><p>Prof. Lehnert focused on the so-called investment factor, an investment strategies that is long in a conservative investment portfolio and short in an aggressive investment portfolio. He explains that &#8220;stock prices of high- and low-investment firms are differentially affected by market-level euphoria. For example, the observed mispricing during periods of euphoria and the subsequent correction is particularly pronounced for a high investment portfolio compared to a low investment portfolio. As a result, the performance of an investment factor can be predicted using information about retail investors\u2019 optimism and pessimism.&#8221;<\/p><p>Interestingly, the relationship between past flows and the investment factor is not only statistically significant, but also economically significant. The study shows that, overall, a related trading strategy consistently and significantly outperforms static strategies and generates significant annual alphas of 7% after accounting for well-known risk factors. Interestingly, the flow measure, which serves as a proxy for market-level euphoria, dominates other well-known indicators of investor sentiment.<\/p><p>&#8220;So far, the common view is that retail investors are \u2018moody\u2019 and exhibit irrational trading behaviour. My explanation that corporate managers and investors are jointly caught up in market euphoria offers a novel perspective on how financial markets can affect the real economy\u201d, Prof. Lehnert explains. \u201cIt appears that stock market inefficiencies matter even for real decisions of firms,\u201d he concludes.<\/p><\/div><\/section>","protected":false},"excerpt":{"rendered":"<p>Corporate managers\u2019 investment behaviour is affected by waves of investor optimism and pessimism. Hence, the performance of an investment factor can be predicted. A dynamic trading strategy that is based on signals from past flows between bond and equity mutual funds and the investment factor generates a significant annual alpha of 7%.<\/p>\n","protected":false},"author":0,"featured_media":916,"template":"","format":"standard","meta":{"featured_image_focal_point":[],"show_featured_caption":false,"ulux_newsletter_groups":"","uluxPostTitle":"","uluxPrePostTitle":"","_trash_the_other_posts":false,"_price":"","_stock":"","_tribe_ticket_header":"","_tribe_default_ticket_provider":"","_tribe_ticket_capacity":"0","_ticket_start_date":"","_ticket_end_date":"","_tribe_ticket_show_description":"","_tribe_ticket_show_not_going":false,"_tribe_ticket_use_global_stock":"","_tribe_ticket_global_stock_level":"","_global_stock_mode":"","_global_stock_cap":"","_tribe_rsvp_for_event":"","_tribe_ticket_going_count":"","_tribe_ticket_not_going_count":"","_tribe_tickets_list":"[]","_tribe_ticket_has_attendee_info_fields":false},"news-category":[],"news-topic":[],"organisation":[101],"authorship":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.3 (Yoast SEO v22.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How stock market inefficiencies can affect the real economy - FDEF news I University of Luxembourg<\/title>\n<meta name=\"description\" content=\"Corporate managers\u2019 investment behaviour is affected by waves of investor optimism and pessimism. Hence, the performance of an investment factor can be predicted. A dynamic trading strategy that is based on signals from past flows between bond and equity mutual funds and the investment factor generates a significant annual alpha of 7%.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How stock market inefficiencies can affect the real economy\" \/>\n<meta property=\"og:description\" content=\"Corporate managers\u2019 investment behaviour is affected by waves of investor optimism and pessimism. Hence, the performance of an investment factor can be predicted. A dynamic trading strategy that is based on signals from past flows between bond and equity mutual funds and the investment factor generates a significant annual alpha of 7%.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/\" \/>\n<meta property=\"og:site_name\" content=\"FDEF EN\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/uni.FDEF.lu\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.uni.lu\/wp-content\/uploads\/sites\/3\/2022\/06\/how_stock_market_inefficiencies_can_affect_the_real_economy.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"600\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data1\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"NewsArticle\",\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/\"},\"author\":{\"name\":\"\",\"@id\":\"\"},\"headline\":\"How stock market inefficiencies can affect the real economy\",\"datePublished\":\"2022-06-27T15:40:41+00:00\",\"dateModified\":\"2022-06-27T15:40:41+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/\"},\"wordCount\":396,\"publisher\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.uni.lu\/wp-content\/uploads\/sites\/3\/2022\/06\/how_stock_market_inefficiencies_can_affect_the_real_economy.jpg\",\"inLanguage\":\"en-GB\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/\",\"url\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/\",\"name\":\"How stock market inefficiencies can affect the real economy - FDEF news I University of Luxembourg\",\"isPartOf\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.uni.lu\/fdef-en\/news\/how-stock-market-inefficiencies-can-affect-the-real-economy\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.uni.lu\/wp-content\/uploads\/sites\/3\/2022\/06\/how_stock_market_inefficiencies_can_affect_the_real_economy.jpg\",\"datePublished\":\"2022-06-27T15:40:41+00:00\",\"dateModified\":\"2022-06-27T15:40:41+00:00\",\"description\":\"Corporate managers\u2019 investment behaviour is affected by waves of investor optimism and pessimism. 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