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Investor behavior and filter rule revisiting

Zhenya Liu and Yaosong Zhan

Journal of Behavioral and Experimental Finance, 2022, vol. 33, issue C

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.

Keywords: Investor behavior; Drawdown aversion; Filter rule; Optimal stopping problem (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:33:y:2022:i:c:s2214635022000041

DOI: 10.1016/j.jbef.2022.100631

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