재무연구 제 권 호 (2012년 5월)
Asian Review of Financial Research, Vol., No..
pp.2552~2600
pp.2552~2600
Ambiguity, Overconfidence, and Excess Arbitrage
Min Hwang Finance and Real Estate, George Washington University, Washington, DC, USA
Soosung Hwang School of Economics, Sungkyunkwan University, Seoul, Korea
Sanha Noh School of Economics, Sungkyunkwan University, Seoul, Korea
We investigate the effects of arbitrageurs’ behavioral biases on cross-sectional equity returns under the assumption that arbitrageurs are Bayesian optimizers. We find that the profits of various equity neutral hedge portfolios are affected by arbitrageurs’ attitude toward ambiguity to signals. Ambiguity-aversion (Epstein and Schneider, 2008) exists before 2000 for some hedge portfolios whose idiosyncratic volatilities increase at positive signals since the positive signals are interpreted as being ambiguous. However, during the 2000s arbitrageurs interpret positive signals as being clear rather than ambiguous, because positive signals confirm their prior beliefs that the trading strategies are profitable. The excess arbitrage from the misinterpretation of positive signals explains why the profitability of equity neutral hedge portfolios appears to decrease in the 2000s despite the fact that their alphas are still positive and significant.
Min Hwang
Soosung Hwang
Sanha Noh
We investigate the effects of arbitrageurs’ behavioral biases on cross-sectional equity returns under the assumption that arbitrageurs are Bayesian optimizers. We find that the profits of various equity neutral hedge portfolios are affected by arbitrageurs’ attitude toward ambiguity to signals. Ambiguity-aversion (Epstein and Schneider, 2008) exists before 2000 for some hedge portfolios whose idiosyncratic volatilities increase at positive signals since the positive signals are interpreted as being ambiguous. However, during the 2000s arbitrageurs interpret positive signals as being clear rather than ambiguous, because positive signals confirm their prior beliefs that the trading strategies are profitable. The excess arbitrage from the misinterpretation of positive signals explains why the profitability of equity neutral hedge portfolios appears to decrease in the 2000s despite the fact that their alphas are still positive and significant.
