The Effect of Confidence in Valuation Estimates on Arbitrager Behavior and Market Prices
33 Pages Posted: 20 Aug 2013
Date Written: August 19, 2013
This paper analyzes market mispricings as a function of arbitragers’ confidence in their valuation estimates and subjective predictions about the future trades of other investors. New insights on the nature of investor psychology are revealed that help explain market cycles and anomalies like the lower (higher) returns to growth stocks (small firms) as well as the tendency to hold winning investments and sell losers.
Keywords: investor confidence, sentiment, arbitrage, psychology, behavioral finance
JEL Classification: G12
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