The Effect of Confidence in Valuation Estimates on Arbitrager Behavior and Market Prices

33 Pages Posted: 20 Aug 2013

See all articles by Austin Murphy

Austin Murphy

Oakland University - School of Business Administration

Date Written: August 19, 2013

Abstract

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

Suggested Citation

Murphy, J. Austin, The Effect of Confidence in Valuation Estimates on Arbitrager Behavior and Market Prices (August 19, 2013). Available at SSRN: https://ssrn.com/abstract=2312644 or http://dx.doi.org/10.2139/ssrn.2312644

J. Austin Murphy (Contact Author)

Oakland University - School of Business Administration ( email )

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