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A rising star on the horizon of finance

News: Mar 21, 2019

His research on investor risk behaviours has been published in some of the most prestigious financial journals. Meet Adam Farago – the School of Business, Economics and Law’s rising star on the financial horizon.

Adam Farago was born and raised in Hungary, but wanted to complete his studies abroad.
- I received my PhD from the Stockholm School of Economics. Afterwards, both me and my wife wanted to stay in Sweden. When an opportunity presented itself in Gothenburg, it felt completely right, says Adam Farago.

Fascination with the finance market

At first, he was drawn to mathematics. Studying economics was more a way to secure a job in the future. But over time, Adam Farago became increasingly interested in finance.
– Sure, the finance market has a bit of a bad reputation, with all the things associated with the Wall Street mentality, but in reality it is a subject that concerns all of us with some form of savings. And there is a great need to understand and create models for how people make financial decisions. Those are the cornerstones of my work: group psychology and mathematical methods, says Adam Farago.

A new way of modelling risk behaviours

Adam Farago’s research challenges the old models used for assessing risk behaviour in the industry. The point of departure is that there is a gap between theory and reality.
– The standard model used to analyse risk behaviours has its roots in the 1970s. It says that risk is just movement: the more turbulence in the market, the greater the insecurity. This model does not take into account whether the market is going up or down. However, both logic and the psychological research say that people care more about the downturns. So the whole idea is more or less to develop mathematical models that can handle a more asymmetrical world, in order to make better predictions in the long term,” says Adam Farago.

Articles in two out of the three best journals

The same fundamental idea has resulted in two articles in prestigious journals. The first relates to how individual investors compose their stock portfolios from a risk perspective. There is a famous article from 1997 showing that the standard theory does not correspond to reality.
– When we use our asymmetrical risk assessment model, we get a better match, especially when we add a new and more nuanced idea of risk assessment for shares. These are the main points of the first article published in the Journal of Finance and Economy, says Adam Farago.

The second article, which was published in the Review of Financial Studies, concerns the market effects of the asymmetrical risk model on a more general level. The article also takes a more in-depth look at the relationship between risk and return when it comes to shares, indicating that there is asymmetry in this field too.

Favourite crashes and hard questions

It takes time to study the finance market. For this reason, financial researchers often have a slightly different view of large recessions than the rest of us.
– Within our field of research, we generally cannot conduct experiments when facts are required. We cannot shock the Swedish stock market to see what will happen. For this reason, the great stock market crashes are super important. They give us tonnes of important data, and there are always many new articles being written after large fluctuations, says Adam Farago.
As a financial researcher, you have to get used to questions about stock market movements or whether a certain security is worth investing in.
– We financial researchers get that all the time, and we do not like it. I can’t see into the future, you know. My research is more about giving a better description of what is actually happening, says Adam Farago with a smile.

BY: The School of Business, Economics and Law Magazine 2018

Page Manager: Maria Norrström|Last update: 9/6/2017

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