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Behavioral Finance: An Analysis of the Performance of Behavioral Finance Funds

Alessandro Santoni and Arun R. Kelshiker
The Journal of Beta Investment Strategies Fall 2010, 1 (2) 56-72; DOI: https://doi.org/10.3905/jii.2010.1.2.056
Alessandro Santoni
is the head of Strategic Planning, Research, and Investor Relations at Banca Monte Paschi, Italy, and a Ph.D. student at the University of Siena in Siena, Italy.
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  • For correspondence: alessandro.santoni@banca.mps.it
Arun R. Kelshiker
formerly a deputy chief executive officer and chief investment officer at Allianz Asset Management Russia, is an MBA student at the University of Chicago in Chicago, IL.
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  • For correspondence: akelshik@chicagobooth.edu
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Abstract

This article analyzes 31 mutual funds whose portfolio construction methodologies employ aspects of behavioral finance. The assets of the mutual funds in the study were valued at approximately US$ 16 billion as of August 2009. Major findings of the authors include the following. First, evidence exists of a strong seasonality effect among behavioral funds. Second, behavioral fund managers exhibit an inability to predict equity market reversals due, in large part, to their willingness to attempt to benefit from trend momentum. Third, they have superior performance during bull market periods vis-à-vis bear market periods, notably with small-cap behavioral funds generally outperforming their large-cap peers. When examining the outperformance of behavioral funds against a respective benchmark, there is no conclusive evidence to suggest that these strategies outperform. The most common observations that behavioral funds attempt to exploit include the momentum effect, winner–loser effect, post-earnings-announcement drift, and prospect theory. Insider buying was also observed as a key signal used by behavioral fund managers to anticipate future market trends.

TOPICS: In portfolio management, portfolio construction, mutual fund performance

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The Journal of Index Investing: 1 (2)
The Journal of Beta Investment Strategies
Vol. 1, Issue 2
Fall 2010
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Behavioral Finance: An Analysis of the Performance of Behavioral Finance Funds
Alessandro Santoni, Arun R. Kelshiker
The Journal of Beta Investment Strategies Aug 2010, 1 (2) 56-72; DOI: 10.3905/jii.2010.1.2.056

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Behavioral Finance: An Analysis of the Performance of Behavioral Finance Funds
Alessandro Santoni, Arun R. Kelshiker
The Journal of Beta Investment Strategies Aug 2010, 1 (2) 56-72; DOI: 10.3905/jii.2010.1.2.056
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  • Article
    • Abstract
    • BACKGROUND LITERATURE
    • APPLICATION TO INVESTMENT PORTFOLIOS
    • BRIEF HISTORY OF BEHAVIORAL FUNDS
    • POLICIES OF BEHAVIORAL FUNDS
    • RESULTS AND MAJOR FINDINGS
    • CONCLUSION
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