IDEAS home Printed from https://ideas.repec.org/a/eee/beexfi/v33y2022ics2214635022000041.html
   My bibliography  Save this article

Investor behavior and filter rule revisiting

Author

Listed:
  • Liu, Zhenya
  • Zhan, Yaosong

Abstract

The filter rule is a popular investment strategy, but its effectiveness and rationality are still controversial. We consider the process of the maximum stock price and the short loss aversion in the utility function and establish an optimal stopping time model. Our model describes the decision-making process of investors applying the filter rule strategy. The filter size of our model is dynamic and depends both on the characteristics of the price process and the investor utility function. A series of numerical simulations present the optimal times to sell the stock under different situations. We also conduct empirical analyses on the Shanghai Stock Exchange Index and the S&P 500 Index, and prove that the filter rule is effective.

Suggested Citation

  • Liu, Zhenya & Zhan, Yaosong, 2022. "Investor behavior and filter rule revisiting," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:beexfi:v:33:y:2022:i:c:s2214635022000041
    DOI: 10.1016/j.jbef.2022.100631
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214635022000041
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.jbef.2022.100631?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Balcombe, Kelvin & Bardsley, Nicholas & Dadzie, Sam & Fraser, Iain, 2019. "Estimating parametric loss aversion with prospect theory: Recognising and dealing with size dependence," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 106-119.
    2. Cooper, Michael, 1999. "Filter Rules Based on Price and Volume in Individual Security Overreaction," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 901-935.
    3. Chang,Fwu-Ranq, 2009. "Stochastic Optimization in Continuous Time," Cambridge Books, Cambridge University Press, number 9780521541947.
    4. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    5. Mayhew, Brian W. & Vitalis, Adam, 2014. "Myopic loss aversion and market experience," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 113-125.
    6. Ling Xin & Kin Lam & Philip L.H. Yu, 2019. "Effectiveness of filter trading as an intraday trading rule," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 38(3), pages 659-674, August.
    7. Charles J. Corrado & Suk-Hun Lee, 1992. "Filter Rule Tests Of The Economic Significance Of Serial Dependencies In Daily Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(4), pages 369-387, December.
    8. Szakmary, Andrew & Davidson, Wallace N, III & Schwarz, Thomas V, 1999. "Filter Tests in Nasdaq Stocks," The Financial Review, Eastern Finance Association, vol. 34(1), pages 45-70, February.
    9. Matsubayashi, Nobuo & Nishino, Hisakazu, 1999. "An application of Lemke's method to a class of Markov decision problems," European Journal of Operational Research, Elsevier, vol. 116(3), pages 584-590, August.
    10. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    11. repec:eme:sef000:sef-09-2018-0294 is not listed on IDEAS
    12. Patricia Chelley-Steeley & James Steeley, 2000. "Portfolio diversification and filter rule profits," Applied Economics Letters, Taylor & Francis Journals, vol. 7(3), pages 171-175.
    13. Suzanne Fifield & David Power & C. Donald Sinclair, 2005. "An analysis of trading strategies in eleven European stock markets," The European Journal of Finance, Taylor & Francis Journals, vol. 11(6), pages 531-548.
    14. Robert B. Durand & Lucia Fung & Manapon Limkriangkrai, 2019. "Myopic Loss Aversion, Personality, and Gender," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 20(3), pages 339-353, July.
    15. Zhang, Wenlang & Semmler, Willi, 2009. "Prospect theory for stock markets: Empirical evidence with time-series data," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 835-849, December.
    16. Shin, Michael, 2021. "Subjective expectations, experiences, and stock market participation: Evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 672-689.
    17. Sweeney, Richard J., 1988. "Some New Filter Rule Tests: Methods and Results," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(3), pages 285-300, September.
    18. Masahiko Egami & Tadao Oryu, 2017. "A direct solution method for pricing options involving the maximum process," Finance and Stochastics, Springer, vol. 21(4), pages 967-993, October.
    19. Dayanik, Savas & Karatzas, Ioannis, 2003. "On the optimal stopping problem for one-dimensional diffusions," Stochastic Processes and their Applications, Elsevier, vol. 107(2), pages 173-212, October.
    20. Charles J. Corrado & Suk-Hun Lee, 1992. "Filter Rule Tests Of The Economic Significance Of Serial Dependencies In Daily Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(4), pages 369-387, December.
    21. Hsien-Yi Lee & Khatanbaatar Sodoikhuu, 2012. "Efficiency Tests in Foreign Exchange Market," International Journal of Economics and Financial Issues, Econjournals, vol. 2(2), pages 216-224.
    22. Langer, Thomas & Weber, Martin, 2005. "Myopic prospect theory vs. myopic loss aversion: how general is the phenomenon?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 25-38, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhenya Liu & Yuhao Mu, 2022. "Optimal Stopping Methods for Investment Decisions: A Literature Review," IJFS, MDPI, vol. 10(4), pages 1-23, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gunasekarage, Abeyratna & Power, David M., 2001. "The profitability of moving average trading rules in South Asian stock markets," Emerging Markets Review, Elsevier, vol. 2(1), pages 17-33, March.
    2. Pereira, Robert, 1999. "Forecasting Ability But No Profitability: An Empirical Evaluation of Genetic Algorithm-optimised Technical Trading Rules," MPRA Paper 9055, University Library of Munich, Germany.
    3. Žmuk Berislav, 2016. "Capabilities of Statistical Residual-Based Control Charts in Short- and Long-Term Stock Trading," Naše gospodarstvo/Our economy, Sciendo, vol. 62(1), pages 12-26, March.
    4. Kim, Minho & Szakmary, Andrew C. & Mathur, Ike, 2000. "Price transmission dynamics between ADRs and their underlying foreign securities," Journal of Banking & Finance, Elsevier, vol. 24(8), pages 1359-1382, August.
    5. Yochanan Shachmurove & Uri BenZion & Paul Klein & Joseph Yagil, 2001. "A Moving Average Comparison of the Tel-Aviv 25 and S&P 500 Stock Indices," Penn CARESS Working Papers 4731f3394c43bebf4d3191c81, Penn Economics Department.
    6. Ana-Maria Fuertes & Elena Kalotychou & Natasa Todorovic, 2015. "Daily volume, intraday and overnight returns for volatility prediction: profitability or accuracy?," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 251-278, August.
    7. Marshall, Ben R. & Cahan, Rochester H. & Cahan, Jared M., 2008. "Does intraday technical analysis in the U.S. equity market have value?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 199-210, March.
    8. Jan Polach & Jiri Kukacka, 2019. "Prospect Theory in the Heterogeneous Agent Model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(1), pages 147-174, March.
    9. Cheol‐Ho Park & Scott H. Irwin, 2007. "What Do We Know About The Profitability Of Technical Analysis?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(4), pages 786-826, September.
    10. Kazi Iqbal & Asad Islam & John List & Vy Nguyen, 2021. "Myopic Loss Aversion and Investment Decisions: From the Laboratory to the Field," Framed Field Experiments 000730, The Field Experiments Website.
    11. Hongzhong Zhang, 2018. "Stochastic Drawdowns," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10078.
    12. Iturbe-Ormaetxe, Iñigo & Ponti, Giovanni & Tomás, Josefa, 2019. "Is it myopia or loss aversion? A study on investment game experiments," Economics Letters, Elsevier, vol. 180(C), pages 36-40.
    13. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2017. "Does Aggregated Returns Disclosure Increase Portfolio Risk Taking?," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 1971-2005.
    14. Iñigo Iturbe-Ormaetxe & Giovanni Ponti & Josefa Tomás, 2016. "Myopic Loss Aversion under Ambiguity and Gender Effects," PLOS ONE, Public Library of Science, vol. 11(12), pages 1-11, December.
    15. Bachar Fakhry & Christian Richter, 2018. "Does the Federal Constitutional Court Ruling Mean the German Financial Market is Efficient?," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 4(2), pages 111-125.
    16. Zeisberger, Stefan & Langer, Thomas & Trede, Mark, 2007. "A note on myopic loss aversion and the equity premium puzzle," Finance Research Letters, Elsevier, vol. 4(2), pages 127-136, June.
    17. Akshita Singh & Shailendra Kumar & Utkarsh Goel & Amar Johri, 2023. "Behavioural biases in real estate investment: a literature review and future research agenda," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-17, December.
    18. Azmat, Saad & Jalil, Muhammad Naiman & Skully, Michael & Brown, Kym, 2016. "Investor’s choice of Shariah compliant ‘replicas’ and original Islamic instruments," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 4-22.
    19. Sergio Ortobelli Lozza & Enrico Angelelli & Daniele Toninelli, 2011. "Set-Portfolio Selection with the Use of Market Stochastic Bounds," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 5-24, November.
    20. Michael McAleer & John Suen & Wing Keung Wong, 2016. "Profiteering from the Dot-Com Bubble, Subprime Crisis and Asian Financial Crisis," The Japanese Economic Review, Japanese Economic Association, vol. 67(3), pages 257-279, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:beexfi:v:33:y:2022:i:c:s2214635022000041. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-behavioral-and-experimental-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.