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Essays on International Asset Management: Evidence for Developed West and Emerging East

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Marina Nikiforow

Asset management is a global business, spreading from developed financial centers to emerging and transition markets. Empirical analyses of professional investors’ investment processes are justified not only by their key role in the traditional finance theory, as rational agents contributing to market efficiency, but also by the behavioral finance, finding evidence on irrational biases in their investment behavior. This study provides survey evidence on views and investment behavior of 772 fund managers from 274 investment companies in the USA, Germany, Thailand, Russia and Ukraine. New insights are gained on the persistency of behavioral biases. Cross-country comparisons shed light on fund managers’ information processing and investment behavior in different institutional market settings.

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1. Introduction 1

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.1 Motivation and contribution of this dissertation Asset management is a global business which has spread from developed financial centers to emerging and transition1 markets. Investment professionals manage huge volumes of assets and thus possess potential to influence not only asset pricing, but also economic development – obviously demonstrated by the recent financial crisis. Hence, knowledge about the investment behavior of this important group of investors is valuable as it helps to elucidate price movements on international financial markets. The relevance of professional asset managers can be best highlighted by the role assigned to them in the finance theory. To explain financial markets, the traditional finance framework provides models with “rational” agents and “informational efficient” markets: Investors are assumed to process all available information and thus correctly form their expectations about securities’ future cash flows. In that case, a security’s actual price reflects its true “fundamental value” – the discounted sum of expected future cash flows. This prominent Efficient Market Hypothesis (EMH), differentiating the weak-, semistrong- and strong-form market efficiency, has been formulated by Fama (1970). Moreover, in efficient markets there are no unexploited profit opportunities (“no free lunch”). The early work by Friedman (1953) suggests that even if not all investors were fully rational, the group of rational investors would quickly eliminate any deviation from a security’s fundamental value, i.e. a mispricing, caused by irrational traders. Rational traders are thus considered as “arbitrageurs” or “smart money”, who make riskless profits at no cost by exploiting mispricing and thus pushing prices back...

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