Considering the complex topic – did you already have professional experience prior to doing your master’s degree?
Jiaojiao Zhao: Before I started my MBA program at MBS, I had more than five years’ experience in fund administration and oversee investment management. Without this professional background, I don’t think I could understand this topic easily or perform this sophisticated financial data analysis.
So did everything go smoothly – your supervisor hinted at some problems with a paper that seemed to be about a very similar topic? How did you deal with it?
Jiaojiao Zhao: The research was never easy. I encountered four major difficulties:
- There wasn’t any good proxy for risk-free rate of Europe from 1980 to 1999, except the total return of REXP (A German government bond index). If we wanted to be more precise, we would need to end up doing extensive weighting of several time-series of short-term interest rate for multiple countries, involving currency issues as well, because currency is not united before the EU was set up. When I plotted the time-series diagram, however, it turned out the volatility was way too high. In the end, after consulting professor Kenneth French (the owner of the famous Fama-French asset pricing models), the monthly interest rate of the U.S. one-month T-bill was used as the risk- free rate.
- Initially, we had planned to apply the most recent asset pricing model – the q5-factor model. But we had to give up the fifth factor – the expected growth factor – because it was too complex to compute. Therefore I had to go with the q-factor model which contains four risk factors.
- The result of the investment factor was not close to what I expected. My outcome is negative while it is positive in most of the current research. I conducted the computation from scratch again and again with different parameters, more than 20 times as I remember, but the value didn’t vary too much. I computed the investment factor in the Fama-French model with a different portfolio sorting strategy and I got a similar outcome. Finally, I further verified the negative return factor by a cross-sectional factor regression testing.
- When I almost finished my thesis, I found a very recent work paper of two professors at TUM who also calculated the q-factor returns of the European equity market. This research studied a small sample over the period from 1990 to 2018 and its main objective is to compare influential pricing models from behavioral finance and neoclassical finance. Luckily, my thesis has a different sample, different testing period and different research objective, so I only had to change my wording on the research gap.
Looking back on your time at MBS and on writing your thesis – what’s your view on the whole process?
Jiaojiao Zhao: I started my MBA program in September last year. After two months of classes, I felt that the study was not as time-intensive as I was expecting, so I found a part-time job which was highly related to my previous work experience. In February this year, I began my research for the master’s thesis. Since the opportunity cost of this study is huge for me, I pushed myself hard and managed to graduate in September as planned. Afterwards, I switched to a full-time position in the same company. Looking back on this one year, I’m glad that I managed my time and schedule very well in spite of all those struggles and frustrations. I would say, to have a clear goal is very important: why you are here, who you want to be, where you want to go and what you want to accomplish.
What does it mean to you that your thesis is the first contribution in the new working paper series? Would you recommend it to other students and why?
Jiaojiao Zhao: Well, it’s the recognition from my professor and the university for my hard work. I’m really honored to be the first one. Yes, I would definitely recommend it to other students because getting the master’s thesis published is an awesome accomplishment. And this new series can be a good motivation for students to do some deep research and submit more high-quality theses.
Where are you now and what are your expectations for the near future?
Jiaojiao Zhao: I’m currently working full time as project and process manager of fund onboarding at AssetMetrix. Despite this global pandemic, I’m very happy with my job, my great team as well as my life in Germany. I hope that everyone stays safe and healthy during this special period. Hang in there, everything will get better. With the vaccine, we can already see the light at the end of the tunnel. And I wish good luck to all my classmates and hope that they can complete their master’s theses successfully and find a good job in the near future.
Thank you for your time and good luck for your future path!