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Behavioral Investment Strategy Matters: A Statistical Arbitrage Approach

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  • David S. Sun
  • Shih-Chuan Tsai
  • Wei Wang

Abstract

In this study, we employ a statistical arbitrage approach to demonstrate that momentum strategies work only in longer formation and holding periods, a result more conclusive than standard parametric tests can offer. Disposition and overconfidence effects are important factors contributing to the phenomenon. The overconfidence effect seems to dominate the disposition effect, especially in an up market. Moreover, the overconfidence investment behavior of institutional investors is the main cause for significant momentum returns observed in an up market. In a down market, the institutional investors tend to adopt a contrarian strategy while the individuals are still maintaining momentum behavior within shorter periods.

Suggested Citation

  • David S. Sun & Shih-Chuan Tsai & Wei Wang, 2013. "Behavioral Investment Strategy Matters: A Statistical Arbitrage Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S3), pages 47-61, July.
    • Handle: RePEc:mes:emfitr:v:49:y:2013:i:s3:p:47-61
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    More about this item

    Keywords

    disposition effect; market state; momentum strategy; statistical arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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