Short-run arbitrage in crisis markets-experimental evidence

The field experimental approach was utilized to collect expectations-Arbitrage portfolios from competent investors in late 2008 where stock prices shrunk by 50%. Positions were closed after three months and the four-factor model was applied to characterize strategies and derive risk-Adjusted returns. In line with classic judgment literature findings (Lichtenstein et al., 1982), performance significantly improves with prior self-confidence, although the participants exhibit typical patterns of overconfidence. The time-series estimations reveal that the experimental arbitrageurs generally benefited from "leveraging the crisis", but the highly confident delivered positive alpha beyond loading on common premia. The experimental results are discussed in light of the literature on expertise and stock selection in crisis markets.