Abstract

http://ssrn.com/abstract=2060983
 
 

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A Tale of Two Investors: Estimating Optimism and Overconfidence


Giovanni Barone-Adesi


Swiss Finance Institute at the University of Lugano; Swiss Finance Institute

Loriano Mancini


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Hersh Shefrin


Santa Clara University - Leavey School of Business

July 19, 2013

Swiss Finance Institute Research Paper No. 12-21

Abstract:     
We estimate investors' sentiment from option and stock prices by anchoring objective beliefs to a neoclassical pricing kernel. Our estimates of sentiment correlate well with other sentiment measures such as the Baker--Wurgler index, the Yale/Shiller crash confidence index and the Duke/CFO survey responses, and yet contain additional information. Our analysis points out three significant issues related to overconfidence. First, the Baker--Wurgler index strongly reflects excessive optimism but not overconfidence. Second, the dynamics of optimism and overconfidence generate a perceived negative risk-return relationship, while objectively the relationship is positive. Third, overconfidence drives the pricing kernel puzzle.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2295896

Number of Pages in PDF File: 50

Keywords: Sentiment, Risk Aversion, Pricing Kernel, Optimism, Overconfidence

JEL Classification: G02, G12

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Date posted: May 18, 2012 ; Last revised: July 22, 2013

Suggested Citation

Barone-Adesi, Giovanni and Mancini, Loriano and Shefrin, Hersh, A Tale of Two Investors: Estimating Optimism and Overconfidence (July 19, 2013). Swiss Finance Institute Research Paper No. 12-21. Available at SSRN: http://ssrn.com/abstract=2060983 or http://dx.doi.org/10.2139/ssrn.2060983

Contact Information

Giovanni Barone-Adesi
Swiss Finance Institute at the University of Lugano ( email )
Via Buffi 13
CH-6904 Lugano
Switzerland
+41 58 666 4671 (Phone)
+41 58 666 46 47 (Fax)
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Loriano Mancini
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Bâtiment Extranef
1015 Lausanne, CH-1015
Switzerland
HOME PAGE: http://sfi.epfl.ch/mancini.html
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Hersh M. Shefrin (Contact Author)
Santa Clara University - Leavey School of Business ( email )
Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)
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