Behavioral Investment Strategy Matters: A Statistical Arbitrage Approach.

Abstract

In this study, we employ a statistical arbitrage approach to demonstrate that momentum strategies work only in longer formation and holding periods, a result more conclusive than standard parametric tests can offer. Disposition and overconfidence effects are important factors contributing to the phenomenon. The overconfidence effect seems to dominate the disposition effect, especially in an up market. Moreover, the overconfidence investment behavior of institutional investors is the main cause for significant momentum returns observed in an up market. In a down market, the institutional investors tend to adopt a contrarian strategy while the individuals are still maintaining momentum behavior within shorter periods.