Short-Run Arbitrage in Crisis Markets – Experimental Evidence
Forthcoming, Annals of Financial Economics
37 Pages Posted: 20 Jul 2018
Date Written: November 1, 2011
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: Suggested Citation