Advances in Economics, Management and Political Sciences
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Proceedings of the 2nd International Conference on Business and Policy Studies
Series Vol. 17 , 13 September 2023
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Arbitrage Strategy Based on DHS Pricing Model
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Abstract
The Daniel-Hirshleifer-Sun (DHS) is a three-factor model based on the investor’s psychology. It supplements the market factors of the CAPM model with two behavioral factors that capture commonalities in mispricing resulting from psychological biases. The DHS method focuses on two psychological biases affecting asset prices: overconfidence and limited attention. According to Daniel, Hirshleifer, and Sun, overconfidence in the investor tends to induce commonality in long-horizon mispricing.In contrast, the inattention of the investor tends to induce commonality in short-horizon mispricing. In this strategy, assets are priced according to the DHS model, and the unexplained return generated from this model is traded. According to the back-test, the explanation power of the DHS model is limited in Chinses market. As a result, the arbitrage strategy based on this model cannot generate a decent return in the long run. However, this strategy generates a significant positive return in turbulent market conditions. During these periods, investors tend to panic, and their psychology is especially unstable, so the two behavioral factors can explain the return efficiently.
Keywords
Daniel-Hirshleifer-Sun three-factor model, arbitrage strategy, Shanghai and Shenzhen stock market
References
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Data Availability
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.
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- Volume Title
- Proceedings of the 2nd International Conference on Business and Policy Studies
- ISBN (Print)
- 978-1-915371-77-5
- ISBN (Online)
- 978-1-915371-78-2
- Published Date
- 13 September 2023
- Series
- Advances in Economics, Management and Political Sciences
- ISSN (Print)
- 2754-1169
- ISSN (Online)
- 2754-1177
- DOI
- 10.54254/2754-1169/17/20231064
- Copyright
- 13 September 2023
- Open Access
- This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited