Overconfidence, Information Diffusion, and Mispricing Persistence

89 Pages Posted: 24 Dec 2018 Last revised: 2 Jul 2019

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Alexander Klos

University of Kiel - Institute for Quantitative Business and Economics Research (QBER)

Simon Rottke

University of Amsterdam - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2019

Abstract

Short-sale constrained past-winners and losers both underperform strongly in the first year post-formation, earning market-adjusted returns of -13%, and -17%, respectively. However, constrained winners continue to underperform for the following four years, earning a cumulative market-adjusted return of -40% (t=-6.31), while past-losers earn 6% (t=0.56). This persistence differential cannot be explained by existing models or by simple extensions of existing models. We propose a dynamic heterogeneous agents model featuring overconfidence and slow information diffusion, which is able to explain this asymmetry in mispricing persistence among short-sale constrained stocks, and to match value and momentum effects for unconstrained stocks.

Keywords: overconfidence, information diffusion, short-sale constraints, momentum, value, mispricing

JEL Classification: G02, G12, G14

Suggested Citation

Daniel, Kent D. and Klos, Alexander and Rottke, Simon, Overconfidence, Information Diffusion, and Mispricing Persistence (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3294053 or http://dx.doi.org/10.2139/ssrn.3294053

Kent D. Daniel

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4679 (Phone)
212-854-4679 (Fax)

HOME PAGE: http://kentdaniel.net/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexander Klos

University of Kiel - Institute for Quantitative Business and Economics Research (QBER) ( email )

Heinrich-Hecht-Platz 9
Kiel, 24118
Germany

HOME PAGE: http://www.qber.uni-kiel.de/

Simon Rottke (Contact Author)

University of Amsterdam - Finance Group ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

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