Behavioral Investment Strategy Matters: A Statistical Arbitrage Approach

Sun, David; Tsai, Shih-Chuan; Wang, Wei

doi:10.2753/ree1540-496x4904s304

Cited by 5 publications

(5 citation statements)

References 12 publications

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“…To the best of our knowledge, this is the first such study, which applies this approach for research focused on the behaviour of institutional investors. Barber et al (2007), Susai and Moriyasu (2007), Choe and Eom (2009), Menkhoff et al (2010), Chou and Wang (2011), Cici (2012), Kudryavtsev et al (2013), Sun et al (2013), Bodnaruk and Simonov (2014). Shapira and Venezia (2001), Garvey and Murphey (2004), Dhar and Zhu (2006), Rzeszutek (2016) Overconfidence Menkhoff et al (2006), De Venter and Michayluk (2008), Waweru et al (2008), Menkhoff (2010), Puetz and Ruenzi (2011), Eshraghi (2011) Our study provides addition to the scarce international literature on the fund managers' behaviour and their decision-making processes by focusing on the extensive analysis of their behavioural biases.…”

Section: Literature Reviewmentioning

confidence: 99%

Do investment fund managers behave rationally in the light of central bank communication? Survey evidence from Poland

Wolski

Bolek²,

Gajdka³

et al. 2023

QRFM

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Purpose This study aims to answer the question whether investment funds managers exhibit behavioural biases in their investment decisions. Furthermore, it investigates if fund managers, as a group of institutional investors, make decisions in response to central bank’s communication as well as other information in relation to various behavioural inclinations. Design/methodology/approach A comprehensive study was conducted based on a questionnaire, which is composed of three main parts exploring: (1) general information about the funds under the management of the surveyed group of fund managers, (2) factors that influence the investment process with an emphasis on the National Bank of Poland communication and (3) behavioural inclinations of the surveyed group. Cronbach’s alpha statistic was applied for measuring the reliability of the survey questionnaire and then chi-squared test was used to investigate the relationships between the answers provided in the survey. Findings The central bank’s communication matters for investors, but its impact on their decisions appears to be only moderate. Interest rates were found to be the most important announcements for investment fund managers. The stock market was the most popular market segment where the investments were made. The ultra-short time horizon played no, or only small, role in the surveyed fund managers’ decisions as most of them invested in a longer horizon covering 1 to 5 years. Moreover, most respondents declared that they considered in their decisions the information about market expectations published in the media. Finally, majority of the fund managers manifested limited rationality and were subject to behavioural biases, but the decisions and behavioural inclinations were independent and, in most cases, they did not influence each other. Practical implications The results reported in this study can be used in practice to better understand and to improve the fund managers’ decision-making processes. Originality/value Apart from the commonly tested behavioural biases in the group of institutional investors in the existing literature, such as loss aversion, disposition effect or overconfidence, this paper also focuses on the less intensively analysed behavioural inclinations, i.e. framing, illusion of the control, representativeness, sunk cost effect and fast thinking. The originality of this study further lies in the way the research was conducted through interviews with fund managers, who were found to be subject to behavioural biases, although those behavioural inclinations did not influence their investment decisions. This finding indicates that professionalism and collectivism in the group of institutional investors protect them from irrationality.

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Section: Literature Reviewmentioning

confidence: 99%

Do investment fund managers behave rationally in the light of central bank communication? Survey evidence from Poland

Wolski

Bolek²,

Gajdka³

et al. 2023

QRFM

View full text Add to dashboard Cite

show abstract

“…Similarly, Sun et al (2013) aimed to explain disposition effect with momentum behavior and overconfidence. When both individual and institutional investor behavior in up and down markets were examined, it was seen that the increase of institutional investor momentum returns in particularly up markets raised overconfidence and that the increased overconfidence weakened disposition effect.…”

Section: Behavioral Biases On Institutional Investorsmentioning

confidence: 99%

“…In down markets, institutional investors employed contrarian strategy and this strategy similarly increased returns and overconfidence therefore reducing disposition effect. Barber et al (2007) and Sun et al (2013) investigated disposition effect in the same market for different periods of time and they both concluded that the absence of disposition effect was related to overconfidence. Some research other than these mentioned studies has explored disposition effect but provided no evidence of its presence.…”

Section: Behavioral Biases On Institutional Investorsmentioning

confidence: 99%

“…Similar to Barber et al (2007) and Sun et al (2013), Chou and Wang (2011) investigated disposition effect in Taiwan Stock Exchange and associated it with overconfident investment behavior. Yet, showing a divergence in explaining it, they suggested that overconfident investor behavior has been constituted from past long-term investment performance rather than the power of influencing asset prices or the adoption of momentum strategy.…”

Section: Behavioral Biases On Institutional Investorsmentioning

confidence: 99%

“…In addition to their sentiment, institutional investors also exhibit some biases which prevent them to act rationally. Within this scope, it provided evidence for status quo bias (Freiburg and Grichnik, 2013), anchoring effect (Liao et al, 2013;Freiburg and Grichnik, 2013), endowment effect (Furche and Johnstone, 2006), ambiguity aversion (Bantwal and Kunreuther, 2000) and overconfidence bias (Shiller, 2000;Sun et al, 2013).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Behavioral biases on institutional investors: a literature review

Aren

Aydemir

Şehitoğlu

2016

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Purpose The purpose of this paper is to evaluate published institutional investor research focused on home bias, disposition effect, and herding behavior in recognized journals and to ascertain some substantial gaps with regard to them. Design/methodology/approach Recently published studies between 2005 and 2014, which intend to examine behavioral biases on institutional investors, have been reviewed through juxtaposing them under the three fundamental titles and figuring them according to the explanation why these biases occurs. Findings The research examining home bias has identified the presence of this effect on institutional investors and explained it with information or culture. Yet, the existence of disposition effect has not been found in the extant research. These studies have estimated disposition effect through overconfidence and experience. Also, extant studies have provided evidence of herding behavior, attributing this behavior to pursuing same published information and protecting their reputation and career. Originality/value Currently, no study, which reviews and evaluates the empirical research body on behavioral biases displayed institutional investors, exists. To the authors’ knowledge, this is the first paper which highlights the empirical evidence on these bias and summarizes the explanations in these studies for these biases exhibited by institutional investors. This could contribute to the researchers focusing on behavioral biases on institutional investors by providing them with a meaningful figuralization regarding their evidence and explanation.

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The implied volatility index: Is ‘investor fear gauge’ or ‘forward-looking’?

Shaikh

Padhi

2015

Borsa Istanbul Review

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The paper aims to examine implied volatility as the investor fear gauge or/and forward-looking expectation of future stock market volatility within emerging markets setting-India VIX. The earliest results evidenced that VIX is the gauge of investor fear, where in the expected stock market volatility rises when the given market is declined. It is also proven that expected volatility is being unbiased estimate of the actual return volatility (30-calendar days); hence, during the market turmoil VIX likely to be biased. Lastly, it is suggested that the nervousness of investor yields potential profit to the options seller (market crises). Thus, our research has practical implications for various reasons, such as, portfolio risk management, stock market volatility forecast, and options pricing.

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Behavioral Investment Strategy Matters: A Statistical Arbitrage Approach

Cited by 5 publications

References 12 publications

Do investment fund managers behave rationally in the light of central bank communication? Survey evidence from Poland

Do investment fund managers behave rationally in the light of central bank communication? Survey evidence from Poland

Behavioral biases on institutional investors: a literature review

The implied volatility index: Is ‘investor fear gauge’ or ‘forward-looking’?

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