Optimistic, but Selling Riskier Stocks – An Arbitrage Experiment in Crisis Market

Sonsino, D. and Shavit, T. (2014). "Optimistic, but Selling Riskier Stocks - An Arbitrage Experiment in Crisis Market." Journal of Behavioral and Experimental Finance, 1, 61-73

31 Pages Posted: 9 Jul 2012 Last revised: 20 Jul 2018

See all articles by Doron Sonsino

Doron Sonsino

Ben-Gurion University of the Negev; Center for Academic Studies

Tal Shavit

College of Management (Israel)

Date Written: July 9, 2012

Abstract

The field-based experimental approach was utilized to collect expectations-arbitrage portfolios from more than 100 competent investors at the pick of the financial crisis. The average annual return on 117 portfolios was 5.2% with 55% profitability rate. Prior self confidence emerges as the strongest predictor of eventual performance, and yearly returns reach 26% for the highest confidence quartile. The stocks selected for short sale were riskier than the stocks selected for purchase and time-series estimations confirmed that the unbalanced positions diminished profitability while markets recuperated. As most participants anticipated the recovery at the time of decision, the selling of riskier stocks suggests that “misperception of financial risk” impaired performance.

Keywords: arbitrage in expectations, sub-prime crisis, self-confidence, misperception of financial risk

JEL Classification: C9, G1, D8

Suggested Citation

Sonsino, Doron and Shavit, Tal, Optimistic, but Selling Riskier Stocks – An Arbitrage Experiment in Crisis Market (July 9, 2012). Sonsino, D. and Shavit, T. (2014). "Optimistic, but Selling Riskier Stocks - An Arbitrage Experiment in Crisis Market." Journal of Behavioral and Experimental Finance, 1, 61-73 . Available at SSRN: https://ssrn.com/abstract=2102577 or http://dx.doi.org/10.2139/ssrn.2102577

Doron Sonsino (Contact Author)

Ben-Gurion University of the Negev ( email )

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

Center for Academic Studies ( email )

Ha-Yotsrim 2
Or Yehuda, 6021816
Israel

Tal Shavit

College of Management (Israel) ( email )

7 Rabin Blvd.
Rishon Lezion
Rishon Lezion, 75190
Israel

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