Forecasting strategies and propensity towards risk among stock market investors
DOI:
https://doi.org/10.14659/PJOEP.2012.01.03Keywords:
momentum and contrarian investment strategies, risk measurement (financial and psychological perspective)Abstract
Tis study tests the effectiveness of two popular investment strategies: momentum and contrarian. The research was conducted on an individual level, separately for buying (opening investment positions) and selling (closing investment positions). The results confirmed that a momentum investment strategy is more effective than a contrarian one for position opening; it brings higher return with a lower risk. It has been also shown that, along with the growth of the tendency to use a contrarian strategy, the propensity towards risk increases, but significant results are obtained by econometric measures of risk (VaR) while position opening and by psychological measures of risk while position closing. This result is an additional argument in the discourse, that pertains to the differences between processes of opening and closing investment position.
References
Barber, B. M., Odean, T. (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. The Journal of Finance, 55(2), 773-806.
Best, P. (2000). Wartość narażona na ryzyko, obliczanie i wdrażanie modelu VaR. Kraków: Oficyna Ekonomiczna.
Blais, A. R., Weber, E. U. (2006). A domain-specific risk-taking (DOSPERT) scale for adult populations. Judgment an Decision Making, 1(1), 33-47.
Blume, M. E., Friend, I. (1973). A New Look at the Capital Asset Pricing Model. The Journal of Finance, 28(1), 19-33.
Burns, B. D. (2003). When it is adaptive to follow streaks. Variability and stocks, (w:) R. Alterman K. D. (Eds.), Proceedings of the Twenty-Fifth Annual Meeting of the Cognitive Science Society (s. 233-239). Hillsdale, NJ: Erlbaum.
Burns, B. D. (2004). Heuristics as beliefs and as behaviors: The adaptiveness of the "hot hand". Cognitive Psychology, 48(3), 295-331.
Choe, H., Kho, B., Stulz, R. (1999). Do foreign investors destabilize stock markets? The Korean experience in 1997. Journal of Financial Economics, 54(2), 227-264.
Chordia, T., Subrahmanyam, A., Anshuman, V. R. (2001). Trading activity and expected stock returns. Journal of Financial Economics, 59(1), 3-32.
Conrad, J., Kaul, G. (1998). An Anatomy of Trading Strategies. Review of Financial Studies, 11 (3), 489-519.
De Bondt, W. F. M. (1991). What Do Economists Know About the Stock Market? Journal of Portfolio Management, 17(2), 84.
De Bondt, W. F. M. (1993). Betting on trends: Intuitive form of financial risk and return. International Journal Forecasting, 9(3), 355-371.
De Bondt, W. F. M., Thaler, R. (1985). Does the Stock Market Overreact? The Journal of Finance, 40(3), 793-805.
Dhar, R., Kumar, A. (2001). A Non-Random Walk Down the Main Street: Impact of Price Trends on Trading Decisions of Individual Investors. Yale International Center for Finance. Working Paper. June.
Epstein, S., Pacini, R., Denes-Raj, V., Heier, H. (1996). Individual Differences in Intuitive-Experiential and Analytical-Rational Thinking Styles. Journal of Personality and Social Psychology, 71,390-405.
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417.
Fama, E. (1995). Random walks in stock market prices. Financial Analysts Journal, 51(1), 75-80.
Furche, A., Johnstone, D. (2006). Evidence of the Endowment Effect in Stock Market Order Placement. Journal of Behavioral Finance, 7(3), 145-154.
Gilovich,T., Vallone, R" Tversky, A. (1985). The hot hand in basketball: On the misperception of random sequences. Cognitive Psychology, 17(3), 295-314.
Goetzmann, W. N., Massa, M. (2002). Daily momentum and contrarian behavior of index fund investors. The Journal of Financial and Quantitative Analysis, 375-389.
Goetzmann, W. N., Ning, Z. (2005). Rain or Shine: Where is the Weather Effect? European Financial Management, 11 (5), 559-578.
Grinblatt, M, Keloharju, M. (2000). The investment behavior and performance of various investor types: a study of Finland's unique data set. Journal of Financial Economics, 55(1), 43-67.
Grinblatt, M., Keloharju, M. (2001). What Makes Investors Trade? The Journal of Finance, 56(2), 589-616.
Grinblatt, M., Titman, S., Wermers, R. (1995). Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior. American Economic Review, 85(5), 1088-1105
Heath, C., Huddart, S., Lang, M. (1999). Psychological Factors and Stock Option Exercise. Quarterly Journal of Economics, 114(2), 601-627.
Jegadeesh, N. (1990). Evidence of Predictable Behavior of Security Returns. The Journal of Finance, 45(3), 881-898.
Jegadeesh, N., Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65-91.
Jegadeesh, N., Titman, S. (2001). Profitability of momentum strategies: An evaluation of alternative explanations. The Journal of Finance, 56(2), 699-720.
Johnson, T. C. (2002). Rational Momentum Effects. The Journal of Finance, 57(2), 585-608.
Kahneman, D., Tversky, A. (1973). On the psychology of prediction. Psychological review, 80(4), 237-251.
Kareev, Y. (1995). Positive bias in the perception of covariation. Psychological review, 102(3), 490.
Kubińska, E., Markiewicz, Ł. (2008). Analiza decyzji inwestycyjnych uczestników gry giełdowej - skłonności wirtualnych inwestorów, inwestujących wirtualne środki. Decyzje, 9,57-82.
Kubińska, E., Markiewicz, Ł. (2009). Punkty odniesienia szerszej skali konta mentalnego uczestników gry giełdowej. Decyzje, 12,79-95.
Kubińska, E., & Markiewicz, Ł. (2012). Pomiar ryzyka jako wyzwanie dla współczesnych finansów. Annales Universitatis Mariae Curie-Skłodowska. Sectio H. Oeconomia, 46(1), 75-83.
Kubińska, E., & Markiewicz, Ł. (2012). Różne podejścia do mierzenia ryzyka inwestycyjnego - perspektywa psychologiczna i finansowa. Zeszyty Naukowe. Uniwersytet Ekonomiczny w Krakowie. Seria Finanse, 889, 49-62.
Kubińska, E., Markiewicz, Ł., & Tyszka, T. (2012). Disposition Effect Among Contrarian and Momentum Investors. Journal of Behavioral Finance, 13(3), 214-225. doi: 10.1080/15427560.2012.708687
Lehmann, B. N. (1990). Fads, Martingales, and Market Efficiency. The Quarterly Journal of Economics, 105(1), 1-28.
Lo, A. W., Repin, D. V. (2002). The psychophysiology of realtime financial risk processing. Journal of Cognitive Neuroscience, 14(3), 323-339.
Lo, A. VV., Repin, D. V., Steenbarger, B. N. (2005). Fear and Greed in Financial Markets: A Clinical Study of Day-Traders. American Economic Review, 9,352-359.
MacGregor, D. G, Slovic, P., Berry, M., Evensky, H. (1999). Perception of Financial Risk: A Survey Study of Advisors and Planners. Journal of Financial Planning, 12(8), 68-86.
March, J. G., Shapira, Z. (1987). Managerial Perspectives on Risk and Risk Taking. Management Science, 33(11), 1404-1418.
Markiewicz, Ł. (2011). Wybrane Inklinacje Inwestorów Giełdowych w Zarządzaniu Portfelem Inwestycyjnym (nieopublikowana praca doktorska). Szkoła Wyższa Psychologii Społecznej Wrocław.
Markiewicz, Ł., & Weber, E. U. (2013). DOSPERT's Gambling Risk-Taking Propensity Scale Predicts Excessive Stock Trading. Journal of Behavioral Finance, 14(1), 65-78. doi: 10.1080/15427560.2013.762000
Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77-91.
Markowitz, H. (1959). Portfolio Selection: Efficient Diversification of Investments. New York: John Wiley i Sons.
Morrin, M., Jacoby, J., Johar, G. V., He, X., Kuss, A., Mazursky, D. (2002). Taking Stock of Stockbrokers: Exploring Momentum versus Contrarian Investor Strategies and Profiles. Journal of Consumer Research, 29(2), 188-198.
Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? The Journal of Finance, 53(5), 1775-1798.
Odean, T. (1999). Do Investors Trade Too Much? American Economic Review, 89(5), 1279-1298.
Olsen, R. A. (2008). Perceptions of Financial Risk: Axioms and Affect. The Icfai University Journal of Behavioral Finance, 5, 58-80.
Olsen, R. A., Cox, C. M. (2001). The Influence of Gender on the Perception and Response to Investment Risk: The Case of Professional Investors. Journal of Psychology Financial Markets, 2(1), 29-36.
Oskarsson, A. T., Van Boven, L., McClelland, G. H., Hastie, R. (2009). What's next? Judging sequences of binary events. Psychological bulletin, 135(2), 262.
Pearson, N. (2002). Risk Budgeting: Portfolio Problem Solving with Value-at-Risk. New York: John Wiley Sons.
Ross, S. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13(3), 341-360.
Rouwenhorst, K. G. (1998). International Momentum Strategies. The Journal of Finance, 53(1), 267-284.
Rouwenhorst, K. G. (1999). Local Return Factors and Turnover in Emerging Stock Markets. The Journal of Finance, 54(4), 1439-1464.
Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425-442.
Shefrin, H., Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory Evidence. The Journal of Finance, 40(3), 777-790.
Sheimo, M. (2005). Stock market rules: 50 of the most widely held investment axioms explained, examined, exposed: McGraw-Hill.
Slovic, P. (1972). Psychological Study of Human Judgment: Implications for Investment Decision Making. Journal of Finance, 27(4), 779-799.
Tversky, A., Kahneman, D. (1971). Belief in the law of small numbers. Psychological Bulletin, 76(2), 105-110.
Tyszka, T., Domurat, A. (2004). Czy istnieje ogólna skłonność jednostki do ryzyka? Decyzje, 2,85-104.
Tyszka, T., Zielonka, P., Dacey, R., Sawicki, P. (2008). Perception of randomness and predicting uncertain events. Thinking and Reasoning, 14(1), 83-110.
Wärneryd, K. (1996). Risk attitudes and risky behavior. Jon of Economic Psychology, 17(6), 749-770.
Weber, E. U., Blais, A. R., Betz, N. E. (2002). A Domain-Specyfic Risk-Attitude Scale: Measuring Risk Perceptions and Risk Behaviors. Journal of Behavioral Decision Making, 15(4), 263-290.
Zaleśkiewicz, T. (2001). Beyond risk seeking and risk aversion: personality and the dual nature of economic risk taking. European Journal of Personality, 15, S105-S122.
Zielonka, P. (2004). Technical analysis as the represents of typical cognitive biases. International Review Financial Analysis, 13(2), 217-225.
Downloads
Issue
Section
License
Authorship
The Author (Co-authors) declares that the submitted paper does not infringe on the third parties’ copyright, consents to submitting the paper to the reviewing procedure and introducing editorial changes in it, and conveys proprietary copyright to the paper free of charge to publisher for uses stipulated in paragraph 50 of the Polish Bill on Copyright and Related Rights of 4.02.1994, provided that the paper has been accepted for publication and published.
Conditions of use
The Publisher owns the proprietary copyright to all materials published in the journal. Articles are made available on the basis of non-exclusive Creative Commons Attribution-NonCommercial-ShareAlike 3.0 licence. The full text of the licence can be found at http://creativecommons.org/licenses/by-nc-sa/3.0/legalcode, and its accessible summary a thttp://creativecommons.org/licenses/by-nc-sa/3.0/deed.en.
Posting the text in the repository, on the author’s homepage or other website is permitted on condition that it does not entail gaining material benefits and the text is equipped with full source documentation (including the title, volume, issue and internet address of the journal).
All those interested in using the materials published in the journal for commercial purposes are kindly requested to contact the Editors.
