Kolja Johannsen

Foreign Ownership and Exchange Rate Exposure (Job market paper)

This paper is the first to investigate the role of exchange rate risk for international investors by looking at stocks’ exchange rate (FX) exposure and its connection to within country differences in foreign ownership. I show both theoretically and empirically that international investors use stocks’ FX exposure to implicitly hedge currency risk. The results stand in contrast to the common assumption that foreign investors would find it optimal to invest into the same portfolio as domestic investors. The latter holds even if hedging is costless. While the results for developed markets are stable over time, there has been a change in how currency risk is handled when holding emerging market stocks after the crisis.

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Toxic Arbitrage and Price Discovery

Toxic arbitrage opportunities are caused by information arriving in one market leading to short lived price deviations between markets. This paper shows that the direction of such arbitrage opportunities provides valuable insights into price discovery and markets’ information shares. Starting from a new theoretical framework of multi-venue trading, I derive an unbiased measure of information shares based on the frequency of toxic arbitrage opportunities. This measure has several advantages over traditional measures of price discovery, especially when looking at low liquidity environments, and provides a valuable addition in the analysis of price dynamics. I illustrate these advantages with a unique dataset for internationally traded foreign exchange futures.



Dead Cat Bounce

This is the first paper to theoretically analyze the temporary reversal of the downward trend in financial assets, also known as dead cat bounce or bear market rally. We show that preferences according to cumulative prospect theory lead an investor to take excessive risk and unprofitable positions in order to recover an initial loss in a declining market. The loss driven behavior results in premature re-entering into the market. We show that heterogeneous investors enter at the same time despite differences in the reference point, wealth and initial loss. The resulting shift in aggregate demand can explain the sudden but temporary reversal common in declining financial markets.