Behavioral Finance Strategies: Evidence from Single-Country Exchange Traded Funds

The aim of this paper is to model and test behavioral finance strategies on various single-country exchange traded funds (ETFs) traded on the New York Stock Exchange and the American Stock Exchange. Behavioral finance strategies seek to exploit market anomalies caused by the irrational behaviors of investors. However, these strategies, in the past, have been commonly tested on single company stocks. This paper will attempt to develop models from behavioral finance methodologies that can be applied and tested on a more diversified investment vehicle, single-country ETFs. The strategies that this paper will test include the momentum strategy in the short run and the contrarian strategy in the long run. This paper will then simulate a portfolio based on these strategies, and attempt to generate excess returns over the benchmark MSCI World Index. After analyzing the simulation results, this paper finds that the underlying ETFs exhibit a stronger long term mean reversion effect than a short term momentum effect. Furthermore, this paper also confirms George and Hwang’s (2004) findings that the nearness to ‘X’-week high indicator is a better predictor of future returns than are past returns.