Behavioral Finance

AgPa #33: World Cups and Stock Markets

Sports Sentiment and Stock Returns (2007)
Alex Edmans, Diego García and Øyvind Norli
The Journal of Finance 62(4), 1967-1998, URL

Given that this week’s AGNOSTIC Paper coincides with the final of the World Cup, I couldn’t resist the temptation. Below you can see a chart of the knockout stage of this year’s tournament. But since you are visiting a nerdy finance website, the focus is not on the results, but on the post-match stock market returns of the playing countries…


You may (understandably) say that this is some nice storytelling but not much more. However, I didn’t made this up to create a story but the idea of this analysis actually comes from this week’s AGNOSTIC paper…

  • Stock markets of losing countries tend to underperform after important matches
  • The effect most likely comes from bad mood after sport losses

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AgPa #23: Trading on the Weather

Global weather-based trading strategies (2022)
Ming Dong, Andréanne Tremblay
Journal of Banking & Finance, Volume 143, 106558, URL/SSRN

People tend to be in a better mood when the sun is shining. That’s nothing dramatically new but this week’s AGNOSTIC Paper shows that this apparently also applies to investors. An investment strategy that went long (short) the stock market index from the country with the best (worst) weather on a particular day generated meaningful (hypothetical) outperformance…

  • The global long-short weather strategy returned 15.2% p.a. between 1993 and 2012
  • The long-only version of the strategy returned 13.4% p.a.

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AgPa #22: Gamification of Trading

Does Gamified Trading Stimulate Risk Taking? (2021)
Philipp Chapkovski, Mariana Khapko, Marius Zoican
Swedish House of Finance Research Paper No. 21-25 via SSRN

Online brokers (Robinhood & Co.) are without question important financial innovations. They offer de-facto free trading and save investors a lot of fees. But they also leverage technology to encourage people to do more transactions. An important part of this is gamification and this week’s AGNOSTIC Paper examines that issue with a pretty cool experiment…

  • Gamification encourages investors to take more risk
  • Inexperienced investors without financial knowledge are most vulnerable

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AgPa #21: AI-Powered vs. Human Funds

Do AI-Powered Mutual Funds Perform Better? (2022)
Rui Chen, Jinjuan Ren
Finance Research Letters, Volume 47, Part A, URL/SSRN

This week’s AGNOSTIC Paper compares the performance of AI-powered- and human mutual funds between 2017 and 2019 in the US. Although AI-powered funds are not the holy grail some investors may have hoped for, they still added value compared to their human peers…

  • AI-powered mutual funds did not outperform the US market
  • But AI-powered funds outperformed their human peers
  • And AI-powered funds avoided the disposition- and rank effect

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AgPa #8: Neuroscientific Insights for Alpha

Harnessing Neuroscientific Insights to Generate Alpha (2022)
Elise Payzan-LeNestour, James Doran, Lionnel Pradier, Tālis J. Putniņš
Financial Analysts Journal, 78(2), 79-95, URL

We are all prone to psychological biases that are very hard to control. This week’s AGNOSTIC Paper examines the after-effect, one particular example for this.

The idea of the after-effect is simple. If you are long enough exposed to a certain stimuli, you will have the illusion of the exact opposite stimuli after the first one disappears. Apparently, this pattern was very relevant for the US stock market…

  • The after-effect distorted the VIX Index
  • Exploiting the after-effect yielded significant alpha

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AgPa #7: Spotify Streaming and Stock Returns

Music sentiment and stock returns around the world (2021)
Alex Edmans, Adrian Fernandez-Perez, Alexandre Garel, Ivan Indriawan
Journal of Financial Economics, In Press, Corrected Proof, URL

This week’s AGNOSTIC Paper examines the role of music sentiment in the stock market. What sounds like statistical hocus-pocus is part of an important question. Do other factors than rational information drive stock markets?

I like the paper for its creative use of alternative data and its clean methodology. But to be honest, I was somewhat skeptical when I first heard about it. However, the authors present an intuitive economic rationale and rigorously test their hypotheses in various robustness checks. The results are quite interesting…

  • Music sentiment is related to stock market returns
  • Music sentiment is more important in less efficient markets
  • Music sentiment is also related to fund flows and bond market returns

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