Short-term contrarian profits and the disposition effect

Shen, Yu-Jan; Shen, Kuan-Fu

doi:10.1016/j.frl.2021.102380

Cited by 6 publications

(5 citation statements)

References 14 publications

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“…These findings provide substantial insights into the rationality of investor behavior, with the disposition effect emerging as a key determinant across diverse market contexts. Additionally, these outcomes concur with the behavioral justifications offered in the research of Barberis and Xiong (2009), G€ arling, Blomman, and Carle (2017), Jonsson et al (2017), Jordan and Diltz (2004), Kaustia (2004), Kirchler et al (2005), Shen and Shen (2022) and Trejos et al (2019).…”

Section: Investors' Sentiments Across Culturessupporting

confidence: 83%

Post-COVID-19 technology adoption and noise trading: elucidation of investors' sentiments across cultures

Tan,

Rasheed,

Rasheed

2024

CAFR

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PurposeDespite its devastating nature, the COVID-19 pandemic has also catalyzed a substantial surge in the adoption and integration of technological tools within economies, exerting a profound influence on the dissemination of information among participants in stock markets. Consequently, this present study delves into the ramifications of post-pandemic dynamics on stock market behavior. It also examines the relationship between investors' sentiments, underlying behavioral drivers and their collective impact on global stock markets.Design/methodology/approachDrawing upon data spanning from 2012 to 2023 and encompassing major world indices classified by Morgan Stanley Capital International’s (MSCI) market and regional taxonomy, this study employs a threshold regression model. This model effectively distinguishes the thresholds within these influential factors. To evaluate the statistical significance of variances across these thresholds, a Wald coefficient analysis was applied.FindingsThe empirical results highlighted the substantive role that investors' sentiments and behavioral determinants play in shaping the predictability of returns on a global scale. However, their influence on developed economies and the continents of America appears comparatively lower compared with the Asia–Pacific markets. Similarly, the regions characterized by a more pronounced influence of behavioral factors seem to reduce their reliance on these factors in the post-pandemic landscape and vice versa. Interestingly, the post COVID-19 technological advancements also appear to exert a lesser impact on developed nations.Originality/valueThis study pioneers the investigation of these contextual dissimilarities, thereby charting new avenues for subsequent research studies. These insights shed valuable light on the contextualized nexus between technology, societal dynamics, behavioral biases and their collective impact on stock markets. Furthermore, the study's revelations offer a unique vantage point for addressing market inefficiencies by pinpointing the pivotal factors driving such behavioral patterns.

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Section: Investors' Sentiments Across Culturessupporting

confidence: 83%

Post-COVID-19 technology adoption and noise trading: elucidation of investors' sentiments across cultures

Tan,

Rasheed,

Rasheed

2024

CAFR

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“…Second, this study is, to the best of our knowledge, the first experimental study conducted with professional traders to test the impact of a behavioural intervention in the context of the disposition effect. Previous studies suggest that the disposition effect is detrimental to trading performance (Odean, 1998;Aspara and Hoffmann, 2015;Duxbury et al, 2015;Shen and Shen, 2022) and imply that market participants would benefit from not displaying the disposition effect or even displaying the reverse disposition effect. Given that these studies relate to securities that do not revert to the mean on average, drawing this conclusion makes sense.…”

Section: Introductionmentioning

confidence: 99%

When the disposition effect proves to be rational: Experimental evidence from professional traders

Guenther

Lordan

2023

Front. Psychol.

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The disposition effect is a behavioural finance anomaly that has been observed in many populations including non-professional investors as well as professional investors and has been linked to reduced trading performance. However, the majority of studies to date have looked at the disposition effect in the context of non-mean reverting markets. We conducted a within-subject experiment with n = 193 professional traders, to examine how the tendency towards the disposition effect varies across decision-making for mean reverting securities and non-mean reverting securities. In addition, we consider whether a simple informational intervention that makes the disposition effect salient can alter decision-making. Overall, we find that prior to the intervention the traders exhibit the disposition effect in the direction that aligns with profit maximisation goals suggesting that they are acting rational. For decisions on mean reverting securities the traders tend to make decisions in the direction of the disposition effect, which is rational given their mean reverting properties. We also find that the informational intervention is effective in changing the level of the disposition effect observed and decision-making, regardless of whether traders are considering decisions over mean reverting or non-mean reverting securities. Further, we provide evidence that our simple informational intervention improves trader returns when making decisions on non-mean reverting securities. In contrast, it has a negative impact when utilised for mean reverting securities. Our study highlights the power of simple interventions to make disproportionately large changes to decision-making regardless of whether they are in our best interests, and their beneficial role only when the context is right.

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“…In the Chinese stock market, institutional investors exhibit a contrarian trading strategy, particularly in up-markets, with positive predictability of future stock returns [65]. Shen and Shen [66] provide evidence supporting the role of the disposition effect in driving short-term contrarian profits in the Chinese stock market. Boussaidi and AlSaggaf [67] find that the representativeness-based behavioral explanation of contrarian profits is not consistent across all the MENA stock markets.…”

Section: Investing Strategiesmentioning

confidence: 90%

Mastery of “Monthly Effects”: Big Data Insights into Contrarian Strategies for DJI 30 and NDX 100 Stocks over a Two-Decade Period

Chiu,

Huang,

Day

et al. 2024

Mathematics

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In contrast to finding better monthly performance shown in a specific month, such as the January effect (i.e., better stock price performance in January as opposed to other months), which has been extensively studied, the goal of this study is to determine whether investors would obtain better subsequent performance as technical trading signals emitted in a specific month because, from the investment perspective, investors purchasing stocks now would not know their performance until later. We contend that our analysis emphasizes its critical role in steering investment decisions and enhancing profitability; nonetheless, this issue appears to be overlooked in the relevant literature. As such, utilizing big data to analyze the constituent stocks of the DJI 30 and NDX 100 indices from 2003 to 2022 (i.e., two-decade data), this study investigates whether trading these stocks as trading signals emitted via contrarian regulation of stochastic oscillator indicators (SOIs) and the relative strength index (RSI) in specific months would result in superior subsequent performance (hereafter referred to as “monthly effects”). This study discovers that the oversold signals generated by these two contrarian regulations in March were associated with higher subsequent performance for holding 100 to 250 trading days (roughly one year) than other months. These findings highlight the importance of the trading time and the superiority of the RSI over SOIs in generating profits. This study sheds light on the significance of oversold trading signals and suggests that the “monthly effect” is crucial for achieving higher returns.

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Short-term contrarian profits and the disposition effect

Cited by 6 publications

References 14 publications

Post-COVID-19 technology adoption and noise trading: elucidation of investors' sentiments across cultures

Post-COVID-19 technology adoption and noise trading: elucidation of investors' sentiments across cultures

When the disposition effect proves to be rational: Experimental evidence from professional traders

Mastery of “Monthly Effects”: Big Data Insights into Contrarian Strategies for DJI 30 and NDX 100 Stocks over a Two-Decade Period

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