Working Papers and Projects
Are Arbitrageurs Less Affected by Behavioral Biases? Evidence from the Cryptocurrency Market (with Pulak Ghosh and Hong Zhang) PDF
Behavioral biases are well-documented among less sophisticated investors. Are arbitrageurs less affected by these issues? To explore this question, we analyze account-level trading data from a leading cryptocurrency exchange in India and use triangular arbitrage opportunities to identify arbitrageurs and noise traders. While arbitrageurs outperform noise traders, we find that they are not immune to behavioral biases. In fact, arbitrageurs often exhibit higher levels of biases, and their returns are also more negatively impacted by a composite behavioral bias index than those of noise traders. Our results suggest that the classical rational assumption about arbitrageurs may be problematic when applied to newly emerged markets, such as cryptocurrencies, which could have important normative implications.
Cybersecurity attacks and Investors’ Trading Behavior (with Pulak Ghosh and Hong Zhang)
The influence of psychological biases on retail cryptocurrency investors’ trading behavior is dynamic and responsive to market incidents. We test how cybersecurity scandals impact investors' decision-making, using account-level data from a major Indian cryptocurrency exchange. Building on a prior classification of arbitrageurs and noise traders, our findings reveal that noise traders respond negatively to cybersecurity events, displaying an increased level of composite behavioral bias despite their lower sensitivity to bias in portfolio performance. This heightened overall bias is primarily driven by elevated lottery preference, suggesting that cybersecurity incidents may amplify speculative tendencies among noise traders.
ETF Flows and Credit Market Sentiment