The Dynamics of Disagreement
54 Pages Posted: 24 Dec 2018 Last revised: 6 Nov 2021
Date Written: November 5, 2021
We infer how the estimates of firm value by 'optimists' and 'pessimists' evolve in response to information shocks by examining returns and disagreement measures for portfolios of short-sale constrained stocks which have experienced large gains or large losses. Our analysis suggests the presence of two groups, one of which overreacts to new information and remains biased over about five years, and a second group which underreacts and whose expectations are unbiased after about one year. Our results have implications for the belief dynamics that underly the momentum and long-term reversal effect.
Keywords: disagreement, differences of opinion, short-sale constraints, momentum, long-term reversal, mispricing persistence
JEL Classification: G12, G14
Suggested Citation: Suggested Citation