Dr. CHEUNG Haywood, 2014 Graduate

Cheung, H., Lai, K. K., & Liu, K. (2011). Performance of biased trend-following stock investor in mainland China and Hong Kong. In Proceedings - 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011 (pp. 548-552). Article 5957722 https://doi.org/10.1109/CSO.2011.202

Abstract:
As extensively documented in literature, stock investors are not fully rational in their trading decisions as many behavioral biases affect their actions. However, most of the behavioral finance literature has explained only empirical phenomena observed in financial markets; little attention has been paid to how technical investors' trading performance is affected by their behavioral biases. Incorporating conservatism bias and disposition effect, we construct a model of moving average strategies to mimic technical trend followers. A comparative study is conducted by applying the model to historical data of SSE Index and HSI for the period from 12 Jul. 1994 to 15 Oct. 2010; findings with respect to different terms (time steps) of trend following and impact of the biases are drawn. It's found that trend-following strategies can remarkably beat both the markets, and trends exist in a shorter term for China stock market than for Hong Kong market. In contrast, downward trend following cannot produce consistent gains in either market. Further, behavioral biases exert detrimental effects on traders chasing trends over shorter terms. © 2011 IEEE.