Risk and return dynamics

The main objective of this dissertation is to shed light on the causes and consequences of time-varying risk in stock markets and to improve the specification and estimation of asset pricing models that incorporate these risk dynamics. Precise measurement of risk is essential for risk managers in financial institutions, for managers in companies to calculate the cost-of-capital used in capital budgeting decisions, for portfolio managers to construct efficient portfolios, and for institutional investors to compute the risk-adjusted performance of their portfolios. Accurate measures of risk are also crucial for research. Important academic applications include the computation of risk-adjusted returns in event studies, the testing of asset pricing models, and the evaluation of the performance of institutional investors like hedge funds, mutual funds, and pension funds.

Another aim of this thesis is to better understand the trading behavior and performance of individual investors, which is important in a world in which people become more responsible for their own financial well-being. The relevance of this research topic is highlighted by the financial crisis in 2008, which showed that many people do not fully understand the structure of complex financial products. This lack of knowledge can have serious consequences for society.