Testing investment strategies based on behavioral finance

Document Type : Original Article

Authors
Hashem Nikoomaram 1
Ali Saeedi 2
Kiarash Mehrani 3
1 Professor of Islamic Azad University, Science & Research Branch
2 Member of Board,Department of Management, North- Tehran Branch, Islamic Azad University
3 Phd student of Islamic Azad University, Science & Research Branch
Abstract
This study has tested momentum and reverse investment strategies in a behavioral finance framework, based on various optimistic, pessimistic and normal market sentiments. At the first step, sentiment Index by means of ARMS Adjusted Trading Index was measured. Then, making use of portfolio analysis, we formed portfolios for 1 month and 3 month periods based on momentum and reverse strategies. Portfolios classification was done based on volatility factor in various behavioral periods. Then returns of different portfolios and strategies was tested by a probit model in different market sentiments (i.e. optimism, pessimism and normal)
Finding of the study reveal that in a normal market sentiment, most of behavioral finance strategies has been successful in terms of return. Moreover, reverse strategies have shown higher efficiency in a normal market state, compared to a momentum strategies. It was surprising when we found that both in a pessimistic and optimistic period, not only any excess return was experienced, but also mostly lead to loss.
In short term, momentum portfolios produced higher return than reverse ones.
Unit root test proved stationary of the sentiment. Since the market was found to be non-stochastic, we conclude stock market inefficiency.
We found in a VAR model framework that optimism is a one-way Granger Couse of stock return, furthermore stock return is a one-way Granger Couse of pessimism.
Keywords
ARMS Index
momentum and reverse strategies
volatility
sentiments
*       اسلامی بیدگلی. محمدی. کاظم زاده. (1390). بررسی سوددهی استراتژی­های شتاب و معکوس (Momentum & Contrarian) در بورس اوراق بهادار تهران.
*       رهنمای رودپشتی، فریدون. زهره حاجیها. و علی زارعی سودانی. (1387). کارکرد مالی رفتاری در تبیین پایگاه علمی برای تجزیه و تحلیل سهام. فصلنامه تولید علم، سال سوم، شماره 7.
*       رهنمای رودپشتی، فریدون. و وحید زندیه. (1391). مالی رفتاری و مالی عصبی(پارادایم نوین مالی) از تئوری تا عمل. تهران: دانشگاه ازاد اسلامی، سازمان چاپ و انتشارات.
*       رهنمای رودپشتی، فریدون، و شهره یزدانی. (1388). کاربرد تئوری­های روانشناسی در حسابداری، پژوهشنامه حسابداری مالی و حسابرسی، شماره 4، ص­ص. 26-1.
*       سعیدی، علی و باقری، سعید. (1389). کاربرد راهبرد معکوس در بورس اوراق بهادار تهران. تحقیقات مالی، دوره 12، شماره 30.
*       سعیدی، علی. (1386). تبیین و ارائه الگوی عکس­العمل رفتاری سرمایه­گذاران در بازار اوراق بهادار تهران (عکس­العمل بیش از حد و کمتر از حد). رساله دکتری مدیریت بازرگانی گرایش مالی. دانشکده مدیریت و اقتصاد. تهران: دانشگاه آزاد اسلامی، واحد علوم و تحقیقات.
*       فدایی نژاد، محمد اسماعیل و صادقی، محسن. (1384). بررسی سودمندی استراتژی های مومنتوم و معکوس در بورس اوراق بهادار تهران. چشم انداز مدیریت بازرگانی، سال پنجم، شماره 17-18.
*       نیکومرام، هاشم. علی سعیدی. فریدون رهنمای رودپشتی. و مهدی معدنچی زاج. (1394). سرعت تعدیل قیمت اوراق بهادار روشی برای ارزیابی بیش واکنشی و کم واکنشی سرمایه گذاران و کارایی بازارهای مالی: رویکردها ، مدلها و نتایج. فصلنامـه علمی پژوهشی دانش سرمایه گـذاری. سال چهارم، شماره چهاردهم.
*       Antoniou, C., Doukas, J. A., & Subrahmanyam, A. (2010). Investor sentiment and price momentum. SSRN eLibrary.
*       Anusakumar, S. V., Ali, R., & Wooi, H. C. (2012). Momentum and Investor Sentiment: Evidence from Asian Stock Markets. In Seventh Annual Conference on Asia-Pacific Financial Markets, South Korea.
*       Arik, A. (2011). Modeling Market Sentiment and Conditional Distribution of Stock Index Returns under GARCH Process, Doctoral dissertation, Claremont Graduate University.
*       Baker, M. & Jeremy, S. (2004). Market liquidity as a sentiment indicator, Journal of Financial Markets, vol. 7, pp. 271-299.
*       Baker, M. and Wurgler, J. (2000). The equity share in new issues and aggregate stock returns, Journal of Finance, vol. 55, pp. 2219–2257.
*       Baker, M., Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns, Journal of Finance, vol. 61(4), pp. 1645-1680.
*       Brown, G. W., Cliff, M. T. (2004), Investor sentiment and the near-term stock market, Journal of Empirical Finance, vol. 11 (1), pp. 1-27.
*       De Long J.B., Shleifer, A., Summers, L.H., and Waldmann, R.J. (1990). Noise trader risk in financial markets, Journal of Political Economy, vol. 98, pp. 703-738.
*       Grinblatt, M., Titman, S., Wermers, R. (1995). Momentum Investment Strategies, Portfolio Performance and Herding: A Study of Mutual Fund Behavior, American Economic Review, vol. 85(5), pp. 1088-1105.
*       Korajczyk, robert and ronnie, Sadka,(2004). are momentum profits robust to trading costs?, the journal of finance, vol. lix, no. 3 june 2004 .
*       Ma, L. (2014). A Model of Momentum and Market States: Theory and Evidence, Available at SSRN 2517168.
*       Markowitz, H. (1952). Portfolio selection, The journal of finance, 7(1), 77-91.
*       Parkinson, B. (1995). Ideas and realities of emotion, Taylor & Francis e-Library, 2001 page 27-70
*       Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk*. The journal of finance, 19(3), 425-442.
*       Strongman, K. T. (2003). The psychology of emotion from everyday life to theory. John Wiley and Sons.
*       wang and keswani (2005), the relationship between sentiments, Returns and volatility. International Journal of Forecasting 22 (2006) 109 – 123
*       Yang, Y., & Copeland, L. (2014). The Effects of Sentiment on Market Return and Volatility and The Cross-Sectional Risk Premium of Sentiment-affected Volatility (No. E2014/12). Cardiff Economics Working Papers