Biased short: Short sellers' disposition effect and limits to arbitrage

Beschwitz, Bastian von; Massa, Massimo

doi:10.1016/j.finmar.2019.100512

Cited by 14 publications

(4 citation statements)

References 51 publications

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“…Short‐term uninformed investors who mis‐react to good market news may become overly optimistic about future cash flows and/or may forecast future risk to be too low, resulting in a new price level that is too high. Once overpriced, the future return must be relatively low to restore the correct price level, informed investors, such as sophisticated traders in Beschwitz and Massa (2020), arbitrageurs in Stambaugh et al (2015), and smart investors in Shleifer and Vishny (1990), will attempt to profit by short selling. Consequently, the ex‐ante risk–return relation observed at the time of overpricing will be lower than it would have been if there were no short selling.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Revisiting the ICAPM under the distortion of risk–return tradeoff in short‐horizon stock returns

2022

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We suggest that the distortion of the positive risk–return relation in the ICAPM is a consequence of trading by informed investors to exploit mispricing. We hypothesize and demonstrate that a non‐positive (strongly positive) risk–return relation following positive (negative) market returns is attributed to short‐selling (purchasing) of overpriced (underpriced) stocks along with optimistic (pessimistic) expectations conditional on good (bad) market news. We verify this asymmetry in the risk–return relation through the indirect risk–return relation conditional on good (bad) market news. We also find that the attenuation (reinforcement) of the positive risk–return relation is more profound in high‐ (low‐) sentiment periods.

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Section: Hypothesis Developmentmentioning

confidence: 99%

Revisiting the ICAPM under the distortion of risk–return tradeoff in short‐horizon stock returns

2022

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“…The disposition effect, known as the cognitive dissonance that appears when investors sell winning stocks too early and realize losses too late (Shefrin & Statman, 1985), has outstanding popularity in regard to behavioral bias research, as shown in Von Beschwitz and Massa (2020) and Haryanto et al (2020).…”

Section: Personality Traits and The Disposition Effectmentioning

confidence: 99%

“…This effect is independent of asset classes and even occurs among experienced investors (Grinblatt & Keloharju, 2001). It is a very popular behavioral bias experiencing high research coverage (Haryanto et al., 2020; Von Beschwitz & Massa, 2020) and is specially affected by social settings; Heimer (2016) showed that “self‐image or reputation […] contributes to the disposition effect.” Introducing an interaction between individuals by allowing access to a social network has a significant influence on individuals' trading behavior, which ultimately increases the disposition effect. By leveraging this argument of reputation (Heimer, 2016), some individuals show a higher disposition effect in a social setting, which could indicate admiration‐seeking behavior (see Pelster and Hofmann (2018) for a similar argument).…”

Section: Introductionmentioning

confidence: 99%

The disposition effect and admiration seeking

Max

Liêu

2021

Rev Financ Econ

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This paper examines the relationship between the disposition effect and personality traits and aims to find an additional explanation of this bias in a willingness to pay for admiration. We conduct a personality assessment, a stock trading game and a sealed‐bid English auction for 84 individual investors. The gathered data correspond with the literature on a descriptive level; however, even though admiration‐seeking behavior is an important part of social interaction, there is no significant willingness to pay for it. Furthermore, we do not see any influence of personality on the disposition effect. Our findings add to the ongoing discussion of personality traits in connection with behavioral biases.

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“…As [42] showed that even professional traders that are normally considered as rational and sophisticated suffer from behavioral biases, our strategy is based on predefined and clear rules to alleviate any unconscious tendencies. In line with [15,16], we implement our trading strategies based on one month ATM options.…”

Section: Trading Periodmentioning

confidence: 99%

Dispersion Trading Based on the Explanatory Power of S&P 500 Stock Returns

Schneider

Stübinger

2020

Mathematics

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This paper develops a dispersion trading strategy based on a statistical index subsetting procedure and applies it to the S&P 500 constituents from January 2000 to December 2017. In particular, our selection process determines appropriate subset weights by exploiting a principal component analysis to specify the individual index explanatory power of each stock. In the following out-of-sample trading period, we trade the most suitable stocks using a hedged and unhedged approach. Within the large-scale back-testing study, the trading frameworks achieve statistically and economically significant returns of 14.52 and 26.51 percent p.a. after transaction costs, as well as a Sharpe ratio of 0.40 and 0.34, respectively. Furthermore, the trading performance is robust across varying market conditions. By benchmarking our strategies against a naive subsetting scheme and a buy-and-hold approach, we find that our statistical trading systems possess superior risk-return characteristics. Finally, a deep dive analysis shows synchronous developments between the chosen number of principal components and the S&P 500 index.

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Biased short: Short sellers' disposition effect and limits to arbitrage

Cited by 14 publications

References 51 publications

Revisiting the ICAPM under the distortion of risk–return tradeoff in short‐horizon stock returns

Revisiting the ICAPM under the distortion of risk–return tradeoff in short‐horizon stock returns

The disposition effect and admiration seeking

Dispersion Trading Based on the Explanatory Power of S&P 500 Stock Returns

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