Short-Run Arbitrage in Crisis Markets – Experimental Evidence

Forthcoming, Annals of Financial Economics

37 Pages Posted: 20 Jul 2018

See all articles by Doron Sonsino

Doron Sonsino

Ben-Gurion University of the Negev

Tal Shavit

College of Management (Israel)

Date Written: November 1, 2011

Abstract

The field experimental approach was utilized to collect expectations-arbitrage portfolios from competent investors in late 2008 where stock prices shrunk by 50%. Positions were closed after 3 months and the 4-factor model was applied to characterize strategies and derive risk-adjusted returns. In line with classic judgment literature findings (Lichtenstein et al., 1982), performance significantly improves with prior self-confidence, although the participants exhibit typical patterns of overconfidence. The time-series estimations reveal that the experimental arbitrageurs generally benefited from “leveraging the crisis”, but the highly confident delivered positive alpha beyond loading on common premia. The experimental results are discussed in light of the literature on expertise and stock selection in crisis markets.

Keywords: experimental arbitrage, sub-prime crisis, self confidence, 4-factor model

JEL Classification: C9, G1, D8

Suggested Citation

Sonsino, Doron and Shavit, Tal, Short-Run Arbitrage in Crisis Markets – Experimental Evidence (November 1, 2011). Forthcoming, Annals of Financial Economics. Available at SSRN: https://ssrn.com/abstract=2102560 or http://dx.doi.org/10.2139/ssrn.2102560

Doron Sonsino (Contact Author)

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

Tal Shavit

College of Management (Israel) ( email )

7 Rabin Blvd.
Rishon Lezion
Rishon Lezion, 75190
Israel

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