Behavioral Finance: Are the Disciples Profiting from the Doctrine?

Behavioral Finance: An Analysis of the Performance of Behavioral Finance Funds

“…The first paper is "Behavioral Portfolios: Performance Measurement" by Reinhart and Brennan [2003] and the second is "Behavioral Finance: Are the Disciples Profiting from the Doctrine?" by Wright, Boney, and Banerjee [2006] that utilized the sample used by Reinhart (nine behavioral funds) adding seven more.…”

Did Behavioral Mutual Funds Exploit Market Inefficiencies During or After the Financial Crisis?

“…2 Table 1 provides the details of the funds used. To build our dataset, we firstly include the same funds that prior studies have used (see Reinhart and Brennan, 2007, Wright et al, 2006, 2008, and Santoni and Kelshiker, 2010. In addition to these funds, an extensive search on Bloomberg fund database was conducted in order to identify other funds that explicitly state in their prospectuses that they follow behavioral strategies.…”

“…This paper is the first to examine how these behavioral funds performed during and after the recent financial crisis period, providing an ideal environment to test the conjecture that their strategies can exploit market inefficiencies and investors' behavioral biases. Secondly, a larger number of funds is employed relative to previous studies in the literature (see Wright, Banerjee andBoney, 2006, andReinhart andBrennan, 2007), who reported inconclusive evidence due to the very small number of funds and short time period they examined. Thirdly, in contrast to the recent study of Santoni and Kelshiker (2010), who provide mainly descriptive statistics on funds' performance, we use a plethora of sophisticated performance evaluation measures that can formally test the existence of superior managerial performance adjusting for common risk factors and using different benchmark indices as well as for their market timing ability.…”

“…Reinhart and Brennan (2007) examined the performance of 9 behavioral mutual funds during the period 1997-2003; they also compared behavioral funds' performance with traditional mutual funds (in terms of premia, alphas, Sharpe ratios, Treynor ratios and information ratios) and showed that inefficiencies can actually improve portfolios' performance, mainly when examining large-cap behavioral funds. In the same spirit, Wright et al (2006) examined the performance of 16 behavioral funds since their inception date, identifying their ability to attract investment flows. They found that even though behavioral funds as a group outperform S&P 500 index funds, they did not deliver abnormal returns once they account for size, value and momentum factors in line with the Fama-French 3-factor and Carhart 4-factor models; this is because behavioral funds exhibited a heavy loading on the value factor.…”

“…This is because they examine a relatively small number of funds, using different and rather short sample periods. Moreover, with the exception of Wright et al (2006), this mixed evidence can be attributed to the use of rather simple performance measures that fail to properly account for market risk as well as other common factors, such as size, value and momentum.…”