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Short-Run Arbitrage In Crisis Markets — Experimental Evidence

Author

Listed:
  • DORON SONSINO

    (School of Business, COMAS — College of Management Academic Studies, 7 Rabin Blvd., P. O. B. 9017, Rishon LeZion, Israel 75190, Israel)

  • TAL SHAVIT

    (School of Business, COMAS — College of Management Academic Studies, 7 Rabin Blvd., P. O. B. 9017, Rishon LeZion, Israel 75190, Israel)

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 three months and the four-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.

Suggested Citation

  • Doron Sonsino & Tal Shavit, 2014. "Short-Run Arbitrage In Crisis Markets — Experimental Evidence," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-60.
    • Handle: RePEc:wsi:afexxx:v:09:y:2014:i:01:n:s201049521450002x
    DOI: 10.1142/S201049521450002X
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    References listed on IDEAS

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    1. Joshua D Coval & David Hirshleifer & Tyler Shumway, 2021. "Can Individual Investors Beat the Market?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 11(3), pages 552-579.
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    More about this item

    Keywords

    Experimental arbitrage; sub-prime crisis; overconfidence; four-factor model; C9; G1; D8;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G1 - Financial Economics - - General Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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