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Are Behavioral Biases Stable Across Markets and Prevalent Across Individuals? Evidence from Individual Betting Choices

Author

Listed:
  • Patrick GAGLIARDINI

    (University of Lugano and Swiss Finance Institute)

  • Christian GOURIEROUX

    (CREST and University of Toronto)

  • Mirco RUBIN

    (University of Lugano and Swiss Finance Institute)

Abstract

In this paper we introduce and study positional portfolio management. In a positional allocation strategy, the manager maximizes an expected utility function written on the cross-sectional rank (position) of the portfolio return. The objective function reflects the goal of the manager to be well ranked among his/her competitors. To implement positional allocation strategies, we specify a nonlinear unobservable factor model for the asset returns. The model disentangles the dynamic of the cross-sectional distribution of the returns and the dynamic of the ranks of the individual assets within the cross-sectional distribution. We estimate the model on a large set of stocks traded in the NYSE, AMEX and NASDAQ markets between 1990/1 and 2009/12, and implement the positional strategies for different investment universes. The positional strategies outperform standard momentum, reversal and mean-variance allocation strategies for most criteria. Moreover, the positional strategies outperform the equally weighted portfolio for criteria based on position.

Suggested Citation

  • Patrick GAGLIARDINI & Christian GOURIEROUX & Mirco RUBIN, 2014. "Are Behavioral Biases Stable Across Markets and Prevalent Across Individuals? Evidence from Individual Betting Choices," Swiss Finance Institute Research Paper Series 14-20, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1420
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    File URL: http://ssrn.com/abstract=2405392
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    More about this item

    Keywords

    Positional Good; Robust Portfolio Management; Rank; Factor Model; Big Data; Equally Weighted Portfolio; Momentum; Positional Risk Aversion;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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