What Makes Individual Investors Exercise Early? Empirical Evidence from Non-Tradable Fixed-Income Products
46 Pages Posted: 5 Apr 2014 Last revised: 25 Mar 2017
Date Written: March 2017
This paper studies the early exercise behavior of individual investors in non-tradable German governmental putable bonds. Analyzing holding and exercise decisions of more than 220,000 individual investors at a single-account level over 13 years, our major findings are: (i) Individual investors use their early exercise right predominantly at times that are not optimal according to standard theory. (ii) Only very few attractive exercise opportunities are exploited over time. (iii) Exercise behavior differs significantly among investor groups and is related to their personal characteristics as well as product characteristics and environmental circumstances. (iv) The demand by investors for liquidity and financial flexibility is apparently a more important motive for investment and exercise than performance seeking.
Keywords: early exercise, failure to exercise, liquidity demand, putable bond
JEL Classification: G10, G11, G13
Suggested Citation: Suggested Citation