Your research is focused on financial markets. How do financial markets actually affect society and people's daily lives?
The development in the world's financial markets has an impact on the decisions of economic entities. It is the same with a small, open economy like the Czech Republic. Rising oil and gas prices can for example translate into higher transport prices after some time, leading not only to higher fuel prices but also to higher prices for other goods. Rising interest rates make borrowing more expensive not only for households but also for businesses and the state that funds part of its budget with bonds. The market in currency pairs in turn affects not only travellers but also businesses that trade with foreign countries. And stock markets around the world serve not only companies for raising capital, but also investors from around the world who manage household investments. There are many other similar cases. These were only the most visible examples. There is important information behind the scenes about the relationship between risk and return. The financial markets and the developments in them send us a signal about the value of the risk we are about to take.
How does the value of risk-taking affect everyday decision-making?
Economics deals with deciding what to do with limited resources but how to achieve our goals. The outcome of these decisions is usually uncertain, and we therefore need to take a risk with our decision. Information from the financial markets helps us answer the question of what reward we should demand for taking that risk, even when the decision is not directly linked to the financial market. We are for example considering buying a property. Let's say that you are buying the property without a loan and expect a net annual long-term return of 6% on the value of the property, including future growth. How do we judge whether this investment is actually good? We can compare the return with a suitable alternative and financial markets often offer such alternatives.
For example, we can invest into companies specializing in renting properties. Using the price performance of these businesses, we can estimate the return expected by investors who are well diversified in the given field. If the return is 6%, then – maybe – renting out one property is not the best idea. Investing in a single property is a bigger risk than owning a small stake in a hundred companies around the world, right? And for taking more risk, we usually demand compensation in the form of higher returns. However, the trends in the relevant stock market can change, so the same 6% can become a lucrative investment from one day to the next. This way, financial markets affect decision-making in economics, finance, management and in everyday life. In my research I try to understand what the influences for price uncertainty in financial markets are, especially the role of investors' attention.
So, what are investors paying attention to?
Attention can be broadly understood as the “amount of resources we need to be able to process information”. I am interested in two kinds of attention. The first is our attention to crisis situations that are inherently irregular and can only be examined retrospectively. The second type is the attention that investors pay to the state of the economy. Here, we can create and also do create predictive models in which attention helps us better predict uncertainty in financial markets. In addition to attention, we are also interested in the context: not only what investors focus on but also what emotions this attention translates into, i.e. sentiment. We follow discussion forums or social media, focusing on a particular event such as the covid pandemic stock markets in general. When we see an increase in news that has a negative sentiment, this usually leads to better predictability of the uncertainty trend in financial markets.
What impact do strong media events, such as public controversies involving famous personalities like Donald Trump or Elon Musk, have on investors' behaviour?
Personalities who we know from the media such as President Trump or Elon Musk have a large number of followers on social media, which makes them potential targets for short-term attention. However, it is crisis situations that generate interest of the media. When the pandemic began five years ago, many of us were interested in information about the virus and its spread, about the numbers of infected, hand washing, travel restrictions, quarantine, and so on. We got this information from the media, social media, discussion forums or from search engines. We, economists, view attention as a very scarce and limited resource. When there is such a surge in attention, we necessarily pay less attention to other topics – for example to economic fundamentals or basic economic indicators and factors that affect the performance and value of companies, markets and economies. The actual crisis leads to the situation that we do not know what the country's economy will look like, and investors are so preoccupied with these events that they may not properly process economic fundamentals. My colleagues and I have demonstrated the correlation between attention to the pandemic and world-wide stock market developments.
Following the surprise invasion of Russian troops into Ukraine in early 2022, we have also shown that part of the depreciation of the Ukrainian hryvnia and the Russian ruble against the euro can be attributed to the increased attention to the conflict. We have also shown how a surge of attention to a bank in the United States in 2023, when news of the bank's problems began to spread massively on social media X, preceded its collapse. The crash was fast, and it was the speed that made it impossible even for the regulator to intervene. We were able to quantify the correlation between social media activity and the bank's share price – at least in the short term.
What trends or patterns in market price behaviour have you found most interesting recently?
Developments in the financial markets can bring new and new surprises. We for example understand why and how a negative electricity price arises. But the negative oil price in April 2020 was unexpected. Looking back, however, it made sense, because at the time there was a risk that in an extreme drop in oil demand, investors speculating in oil would have to physically come to pick the oil up, so they got rid of that oil at any price, at any cost, even negative. We have also become used to negative interest rates on corporate bonds in Europe. In addition, I am fascinated by how predictably inefficient financial markets are during various crises. Recently, I could not miss an episode with the group of joint stock companies in the United States. What happened was that a larger group of small investors coordinated on discussion forums so that the price of selected stocks rose by several hundred percent in a short period of time. The companies involved in this did not expect any such growth, nor were there any changes that would affect it. My colleagues and I examined how activity on discussion forums is related to future price fluctuations for several such companies. One of the last sentences in our paper is our claim that this price effect is unsustainable. However, when we received the study for review after several months of the review proceeding and the price of the shares in question was still extremely high, we decided to modify our sentence.
From next year on, you should be the guarantor of a new unified doctoral study programme at ECON MUNI. How will this programme be different and what changes will it bring for future students?
The new doctoral programme Economics, Finance and Management is a simplification of the current structure of six doctoral programmes, but the point of the programme is to raise the standard of doctoral studies. This joint programme we prepared with the faculty management will lead to several changes. Better selection from a larger pool of applicants is one example, because we will be able to compare them in selection interviews. It is the selection of suitable candidates that is the key factor for the success of doctoral studies. Another change is, following the example of other MUNI faculties and universities around the world, that we will create the so-called thesis advisory committee for each student. This brings the opportunity to involve a top expert from abroad, who will also be responsible for the student's development and who can take the student on research stays.
A unified programme is also leaner and more flexible organisation with one doctoral board. Any changes in the organisation of doctoral studies can then be implemented much more quickly than today. As we will be slightly more selective in choosing suitable candidates in the new programme, we will be able to maintain the higher scholarship and have it easier funding the other research activities of those studying in the programme. And last but not least, we have incorporated several new courses into the programme and concentrated all compulsory courses into the first semester, so that doctoral students can acquire the necessary skills and knowledge as soon as possible and focus on research.
Looking back at your professional career, what advice would you give to young researchers today?
I won't deny my background in finance and say: don't be afraid to invest in yourself. After five years of study, another four years at the doctoral level can seem like a very long time, especially when your peers are starting to gain experience in practice. But for me, being in a good study programme, those four years are the most important for your future career, whether in the academic or non-academic sector. With increasing life expectancy in mind, those four years are not such a huge investment, especially compared to the same four years twenty or thirty years ago. While the returns are huge, you will learn how to think, analyse and solve problems, which will enrich you in a way that work in the private sector can hardly match. The fact is that in a corporation you are not in the first place.
What helped you personally the most at the beginning of your career?
In my first job I had two colleagues who were from different departments, but we shared our interest in financial markets. Having people around you for twenty years who you can not only work with but also trust is extremely valuable, and I think it has helped me the most. Later it was also Professor Roman Horváth from IES CUNI and Professor Peter Molnár from UiS, with whom I collaborated on research. And I also learned a lot from them about academic life and consider them my mentors.
What do you enjoy and what motivates you most about research?
I'll start with what I don't like. Working on paper reviews and when I can't keep up with commitments towards co-authors. I think I enjoy everything else. From teaching to research. I have recently listened to an interview with mathematician Professor Terence Tao (L. Fridman's podcast), from whom I borrow the idea that some researchers are more like specialists who have deep knowledge in their particular topic, and others are generalists who know less but have good insight into many topics. Although I have my own specific field where I specialise, what I enjoy most about research is the freedom to move from one topic to another and to transfer know-how between areas that don't usually communicate very well.
