Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base
ISSN: 1940-5979
Article publication date: 18 August 2022
Issue publication date: 19 June 2023
Abstract
Purpose
The purpose of this paper is to investigate whether downside-risk measures help to explain why households largely refrain from investing in Exchange Traded Funds that replicate broad and internationally diversified market indices, so-called XTFs, although studies frequently recommend to do so.
Design/methodology/approach
The paper analyzes whether evaluating risk in terms of downside-risk measures which reflect households' interpretation of risk closer than the standard deviation (SD) of returns, yields less risk-return-enhancements, and thus, fewer incentives for households to invest in XTFs. Household portfolios are compiled by combining stylized portfolio compositions that involve multiple asset classes and German households' security holdings. The data set covers the period from January 2014 to December 2016 and includes 47,388 securities.
Findings
The results indicate that none of the downside-risk measures can help to explain the reluctance of households to invest in XTFs. On the flip side, the results show that all stylized household portfolios can enhance the risk-return position from employing XTFs, regardless of the underlying risk measure. This supports the advice to invest in XTFs and extends it upon households that evaluate risk in terms of downside-risk.
Originality/value
To the best of the authors' knowledge, this study is the first to investigate risk-return-enhancements from XTFs while simultaneously considering various downside-risk measures and multiple asset classes of household portfolios.
Keywords
Acknowledgements
This paper forms part of a special section “Behavioural Finance and Ethics”, guest edited by Robert Hudson.
This paper uses data from the Deutsche Bundesbank's Securities Holdings Statistics-Base. The results published and the related observations and analyses may not correspond to results or analyses of the data producers. The authors would like to thank Deutsche Bundesbank, especially Martin Eisele, for providing the dataset of the Securities Holdings Statistics-Base. The authors further thank participants of the Behavioural Finance Working Group Conference 2021 and seminar participants at Bamberg University in Bamberg, Germany, for helpful comments and suggestions. All remaining errors are the authors.
Citation
Wanger, H.P. and Oehler, A. (2023), "Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base", Review of Behavioral Finance, Vol. 15 No. 3, pp. 309-339. https://doi.org/10.1108/RBF-08-2021-0158
Publisher
:Emerald Publishing Limited
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