Research
- Behavioral Finance and Social Finance
- Trading activities of retail investors
- Social interactions and (financial) decision making
- Social trading and communication in social networks
- ESG investments in Private Equity
- Arnold, M.; Pelster, M.; Subrahmanyam, M.G. (2022): 'Attention triggers and investors' risk-taking', Journal of Financial Economics 143, 846–875. (a Financial Times 50 Journal, Latest Thinking Video)
The paper investigates the impact of individual attention on investor risk-taking. We analyze a large sample of trading records from a brokerage service that allows its customers to trade contracts-for-differences (CFD), and sends standardized push messages on recent stock performance to its client investors. The advantage of this sample is that it allows us to isolate the "push" messages as individual attention triggers, which we can directly link to the same individuals' risk-taking. A particular advantage of CFD trading is that it allows investors to make use of leverage, which provides us a pure measure of investors' willingness to take risks that is independent of the decision to purchase a particular stock. Leverage is a major catalyst of speculative trading, as it increases the scope of extreme returns, and enables investors to take larger positions than what they can afford with their own capital. We show that investors execute attention-driven trades with higher leverage, compared to their other trades, as well as those of other investors who are not alerted by attention triggers.
Arnold, M.; Pelster, M.; Subrahmanyam, M.G. (2021): “Attention triggers and investors` risk-taking”, Journal of Financial Economics.

- Koester, H.; Pelster, M. (2017): 'Financial penalties and bank performance', Journal of Banking and Finance 79, 57-73. (Latest Thinking Video)
The paper investigates the impact of financial penalties on the profitability and stock performance of banks. Using a unique dataset of 671 financial penalties imposed on 68 international listed banks over the period 2007 to 2014, we find a negative relation between financial penalties and pre-tax profitability but no relation with after-tax profitability. This result is explained by tax savings, as banks are allowed to deduct specific financial penalties from their taxable income. Moreover, our empirical analysis of the stock performance shows a positive relation between financial penalties and buy-and-hold returns, indicating that investors are pleased that cases are closed, that the banks successfully manage the consequences of misconduct, and that the financial penalties imposed are smaller than the accrued economic gains from the banks’ misconduct. This argument is supported by the positive abnormal returns accompanying on the announcement of a financial penalty.
- Mutschmann, M.; Hasso, T.; Pelster, M. (2022): 'Dark triad managerial personality and financial reporting manipulation', Journal of Business Ethics 181, 763-788. (a Financial Times 50 Journal)
The paper investigates the relationship between the dark triad personality traits (Machiavellianism, narcissism, and psychopathy) of managers and the practice of reporting manipulation using a primary survey of 837 professionals working in accounting and finance departments. We find that (a) managers who exhibit dark personality traits are associated with a higher prevalence of fraudulent accounting practices in their accounting and finance departments and (b) traditional risk management mechanisms are only partially effective in mitigating this effect. Internal audits are effective in curtailing the negative behavior of managers with dark triad traits only if these internal audits are outsourced and performed by independent external personnel but not if they are conducted by internal personnel. This suggests that managers with dark triad traits are able to manipulate other employees quite effectively. Consequently, having external personnel perform the auditing task provides a safeguard against such unethical practices and manipulation. This finding has strong practical implications, as it provides support for outsourcing internal audits rather than keeping them in-house.

- Ortmann, R.; Pelster, M.; Wengerek, S.T. (2020): 'COVID-19 and investor behavior', Finance Research Letters 37, 101717.
The paper studies the impact of the COVID-19 outbreak on investors' trading activities. We show that investors significantly increase their trading activities as the pandemic unfolds, both at the extensive and at the intensive margin. The number of investors who first open a brokerage-account increases, while at the same time established investors increase their average trading activities.

- Pelster, M.; Hofmann, A. (2018): 'About the fear of reputational loss: Social trading and the disposition effect', Journal of Banking and Finance 94, 75-88.
The paper studies the relationship between giving financial advice and the disposition effect on a social trading platform. Our empirical findings suggest that leader traders are more susceptible to the disposition effect than investors who are not being followed by any other trader. Using a difference-in-differences approach, we show that becoming a first-time financial advisor increases the disposition effect. This finding holds for investors who engage in foreign exchange trading and for investors who trade stocks and stock market indices. The increased behavioral bias may be explained by leaders feeling responsible to their followers, by a fear of losing followers when admitting a poor investment decision, or by an attempt by newly appointed leaders to manage their social image and self-image.

- Pelster, M.; Hofmann, A.; Klocke, N.; Warkulat, S. (2023): 'Managerial personality traits and selective hedging', Journal of Business Ethics 182, 261-286. (a Financial Times 50 Journal)
We study the relationship between risk managers' dark triad personality traits (Machiavellianism, narcissism, and psychopathy) and their selective hedging activities. Using a primary survey of 412 professional risk managers, we find that managers with dark personality traits are more likely to engage in selective hedging than those without. This effect is particularly pronounced for older, male, and less experienced risk managers. The effect is also stronger in smaller firms, less centralized risk management departments, and family-owned firms.
- Pelster, M.; Schertler, A. (2019): 'Pricing and issuance dependencies in structured financial product portfolios', Journal of Futures Markets 39, 342-365.
The paper studies pricing and issuance dependencies in a sample of structured financial products on the German performance index DAX. The study provides evidence that beyond conventional hedging, cross-pricing and cross-issuance of warrants and discount certificates contributes to risk reductions; consequently, these play an important role as risk management tools. Thus, our study emphasizes cross‐pricing from a perspective not previously considered in the literature.
Social interactions and (financial) decision-making

(D. LOSCHELDER, S. KRULL AND M. PELSTER)
Financial support by the Deutsche Forschungsgemeinschaft (PE 2525/5-1) is gratefully acknowledged.
This project studies the impact of social interactions on investors' financial decision-making and risk taking. In particular, we study preferences for dependencies between payoffs for own prospects in relation to payoffs of peers' prospects and the implications of such dependencies for investors' risk taking.
Social trading, communication, and networks
Revision requested at Information Systems Research (a Financial Times 50 journal)
(J. DENG, M. YANG, M. PELSTER AND Y. TAN)
Social trading is an emerging market in the sharing economy, allowing inexperienced investors (copiers) to automatically follow the trades of experts (leaders) in real time. We use a separable temporal exponential random graph model (STERGM) to analyze the link formation and dissolution of a large social trading network. In contrast to traditional social networks, social trading networks are characterized by a rapid dissolution of links, thereby increasing the importance of studying network dissolution. We investigate how social communication, along with financial performance and demographics, affects dynamic network evolution and address the existing dependence among copier-leader links. Our results show that social communication, financial performance, and demographic factors are important determinants of link formation. However, once a link is formed, copiers mainly focus on financial performance and communication but not on demographic factors. Thus, the determinants of link formation and dissolution are asymmetric. Different types of social communication, such as posts and comments, have different implications for link formation and dissolution. Our findings provide important implications for both investors and social trading platforms. Working Paper
Leverage constraints and investors' choice of underlyings
Financial support by the Dr. Werner Jackstädt-Stiftung is gratefully acknowledged.
This paper investigates the impact of a 2018 intervention by the European Securities and Markets Authority (ESMA) limiting the amount of leverage that investors can take on their trading activities. While it successfully reduced the usage of leverage, investors shifted their trading activities to riskier assets in the process, consistent with the idea that leverage-constraint investors substitute leverage with riskier securities. Thus, the intervention was not as effective as the reduction in leverage suggests. Consistent with the notion that risky investment strategies spread through the population, I find some evidence of a spillover effect to investors who are not affected by the regulatory intervention. Working Paper

Research on Investor Trading Behavior
Using brokerage data, we study the trading behavior of retail investors and how retail investors adjust their trading activities in response to new brokerage-features (for example, push notifications in Arnold et al., 2022, or social interactions in Pelster & Hofmann, 2018) or due to external shocks such as the COVID-19 outbreak (Ortmann et al., 2020) or terrorist activity (Hasso et al., 2020).
- Arnold, M.; Pelster, M.; Subrahmanyam, M.G. (2022): 'Attention triggers and investors' risk-taking', Journal of Financial Economics 143, 846–875 (a Financial Times 50 Journal).
- Hasso, T.; Müller, D.; Pelster, M.; Warkulat, S. (2022): 'Who participated in the GameStop frenzy? Evidence from brokerage accounts', Finance Research Letters 45, 102140.
- Ortmann, R.; Pelster, M.; Wengerek, S.T. (2020): 'COVID-19 and investor behavior', Finance Research Letters 37, 101717.
- Hasso, T.; Pelster, M.; Breitmayer, B. (2020): 'Terror attacks and individual investor behavior: Evidence from the 2015-2017 European terror attacks', Journal of Behavioral and Experimental Finance 28, 100397.
- Pelster, M.; Breitmayer, B.; Hasso, T. (2019): 'Are cryptocurrency traders pioneers or just risk-seekers? Evidence from brokerage accounts', Economics Letters 182, 98-100. (Media Coverage: yahoo finance, coindesk.com, pressetext)
- Hasso, T.; Pelster, M.; Breitmayer, B. (2019): 'Who trades cryptocurrencies, how do they trade it, and how do they perform? Evidence from brokerage accounts', Journal of Behavioral and Experimental Finance 23, 64-74.
- Pelster, M.; Hofmann, A. (2018): 'About the fear of reputational loss: Social trading and the disposition effect', Journal of Banking and Finance 94, 75-88.

Research on Banking, Financial Penalties, and Regulation
Our research studies the effects of financial penalties as well as bank capital, regulation, and supervision on the stock performance and systemic risk of global banks. For example, in Köster and Pelster (2017), we show that announcements of financial penalties are accompanied with increased stock performance.
- Koester, H.; Pelster, M. (2017): 'Financial penalties and bank performance', Journal of Banking and Finance 79, 57-73. (Latest thinking video)
- Koester, H.; Pelster, M. (2018): 'Financial penalties and the systemic risk of banks', Journal of Risk Finance 19, 154-173.
- Pelster, M; Irresberger, F.; Weiß, G. (2018): 'Bank stock performance and bank regulation around the globe', European Journal of Finance 24, 77-113.
Dependency Structures and Their Implications for Asset Pricing
This project is concerned with the implications of dependency structures on asset pricing. Pelster and Vilsmeier (2018) considers the importance of (non-linear) dependency structures in asset pricing for the case of CDS contracts and shows that CDS price dynamics can be mainly explained by factors describing firms' sensitivity to extreme market movements. Pelster and Schertler (2019) show that, beyond conventional hedging, issuers of structured financial products exploit cross-pricing and cross-issuance of warrants and discount certificates as risk management tools.
- Pelster, M.; Schertler, A. (2019): 'Pricing and issuance dependencies in structured financial product portfolios', Journal of Futures Markets 39, 342-365.
- Pelster, M.; Vilsmeier, J. (2018): 'The determinants of CDS spreads: evidence from the model space', Review of Derivatives Research 21, 63-118.