Modeling Investor Behavior Using Machine Learning: Mean-Reversion and Momentum Trading Strategies

Abstract EN

We model investor behavior by training machine learning techniques with financial data comprising more than 13,000 investors of a large bank in Brazil over 2016 to 2018.

We take high-frequency data on every sell or buy operation of these investors on a daily basis, allowing us to fully track these investment decisions over time.

We then analyze whether these investment changes correlate with the IBOVESPA index.

We find that investors decide their investment strategies using recent past price changes.

There is some degree of heterogeneity in investment decisions.

Overall, we find evidence of mean-reverting investment strategies.

We also find evidence that female investors and higher academic degree have a less pronounced mean-reverting strategy behavior comparatively to male investors and those with lower academic degree.

Finally, this paper provides a general methodological approach to mitigate potential biases arising from ad-hoc design decisions of discarding or introducing variables in empirical econometrics.

For that, we use feature selection techniques from machine learning to identify relevant variables in an objective and concise way.