Are Behavioral Biases Stable Across Markets and Prevalent Across Individuals? Evidence from Individual Betting Choices

Patrick Gagliardini, Christian Gourieroux and Mirco Rubin
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Patrick Gagliardini: University of Lugano and Swiss Finance Institute
Mirco Rubin: University of Lugano and Swiss Finance Institute

No 14-20, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In this paper we introduce and study positional portfolio management. In a positional allocation strategy, the manager maximizes an expected utility function written on the cross-sectional rank (position) of the portfolio return. The objective function reflects the goal of the manager to be well ranked among his/her competitors. To implement positional allocation strategies, we specify a nonlinear unobservable factor model for the asset returns. The model disentangles the dynamic of the cross-sectional distribution of the returns and the dynamic of the ranks of the individual assets within the cross-sectional distribution. We estimate the model on a large set of stocks traded in the NYSE, AMEX and NASDAQ markets between 1990/1 and 2009/12, and implement the positional strategies for different investment universes. The positional strategies outperform standard momentum, reversal and mean-variance allocation strategies for most criteria. Moreover, the positional strategies outperform the equally weighted portfolio for criteria based on position.

Keywords: Positional Good; Robust Portfolio Management; Rank; Factor Model; Big Data; Equally Weighted Portfolio; Momentum; Positional Risk Aversion (search for similar items in EconPapers)
JEL-codes: C38 C55 G11 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2014-03
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1420

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