Asset Class Participation and the Effect of Peer Performance on Allocation

Project Start:01/2019
Researchers:Andreas Hackethal, Tobin Hanspal, Dominique Lammer
Category: Household Finance
Funded by:LOEWE

This project consists of two related papers. The first attempts to answer the research question “who invests in cryptocurrencies?” while the second focuses on how asymmetric returns and fees in the portfolios of peers can affect individual portfolio allocation.

While cryptocurrencies have existed for the last decade, these assets have recently begun to gain widespread attention from the media, individual households, financial institutions, and regulatory agencies. Despite growing interest, cryptocurrencies are still under-researched academically. Most notably, information on the characteristics and behaviors of individual investors who chose to buy and trade these assets remains largely undocumented. One reason for the lack of empirical research in this area is due to the inherent anonymous nature of cryptocurrencies. In this paper we provide an initial examination of who invests in cryptocurrencies by exploiting indirect investments into cryptocurrency-based structured retail products. While relatively new to the marketplace, these assets provide an indirect avenue into cryptocurrency investments. These structured products, like participation or index certificates allow shareholders to invest indirectly in a particular cryptocurrency via their existing investment account. Our paper will consider which types of investors are drawn to these assets and quantify their relative performance.

In a second paper, we use a novel setting to examine peer-effects in investment decisions. We leverage administrative retail bank data and measure the peer relationships between customers that recommended the bank to an acquaintance and those who got recommended. Our data allows us to precisely measure the connection between the individuals in our sample and therefore limited assumptions need to be made about the composition of peer groups. To investigate performance, our null hypothesis under a standard model of behavior is that if individual investors are influenced by the actions of their peers, they are influenced equally by gains as they are with losses. We expect to find that this is not the case, and the influence of peer decisions on own portfolio choices is asymmetrical. We then explore the mechanism behind this finding – are gains and losses treated differently because peers share select information? Or rather because peers learn from the failures of their network. Finally, we examine how information about fees and costly funds are transmitted between peers.