What Makes Individual Investors Exercise Early? Empirical Evidence from Non-Tradable Fixed-Income Products

Posted: 5 Apr 2014 Last revised: 5 Nov 2018

See all articles by Mathias Eickholt

Mathias Eickholt

University of Passau

Oliver Entrop

University of Passau

Marco Wilkens

University of Augsburg

Date Written: October 24, 2018

Abstract

This paper studies the early exercise behavior of individual investors in nontradable 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 option pricing theory. (ii) Only very few attractive exercise opportunities are exploited over time. (iii) Both exercises and failure to exercise differ significantly among investor groups, are related to their personal characteristics as well as product characteristics and environmental circumstances, and are subject to cognitive biases. They tend to be persistent over time on the investor level. (iv) The demand by investors for liquidity and financial flexibility is 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

Eickholt, Mathias and Entrop, Oliver and Wilkens, Marco, What Makes Individual Investors Exercise Early? Empirical Evidence from Non-Tradable Fixed-Income Products (October 24, 2018). Journal of Banking and Finance, 97, 2018, 318-334. Available at SSRN: https://ssrn.com/abstract=2420077 or http://dx.doi.org/10.2139/ssrn.2420077

Mathias Eickholt

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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