Financial Economics with Preferences and Frictions

This thesis represents the final product of my PhD studies at the Department of Finance and the Center for Financial Frictions at Copenhagen Business School. The thesis consists of three chapters which document how individuals’ preferences interact with financial markets to produce both financial and real outcomes in often surprising ways. The chapters are self-contained and can be read independently.
The first chapter, “Skills and Sentiment in Sustainable Investing,” won the best paper in finance award at the 2020 conference on behavioral research in finance, governance, and accounting and has been invited to submit to the Review of Financial Studies. The chapter documents that flexible investors, such as hedge funds, have outperformed more socially constrained investors, such as pension funds, in their sustainable investments.
The second chapter, “The Future of Emissions,” proposes to introduce a new financial asset named “Emission Futures”. Emission futures would allow us to make objective forward-looking ESG ratings, which would make impact investing more impactful by decreasing ratings’ inaccuracies and making them less prone to greenwashing.
The third chapter, “Corporate Asset Pricing,” discovers the new fact that idiosyncratic volatility significantly predicts the convenience yield. This fact poses a puzzle with current safe asset theories and explains why these theories have been unable to match the convenience yield since the financial crisis.