Overconfidence, Information Diffusion, and Mispricing Persistence

86 Pages Posted: 24 Dec 2018

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 Muenster - Finance Center Muenster

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2018

Abstract

We propose a dynamic heterogeneous agents model which generates testable hypotheses about the formation, timing and bursting of asset price bubbles in the presence of short-sale constraints, given a calibration that is consistent with momentum and reversal effects for unconstrained assets. Consistent with the model, all short-sale constrained stocks earn strong negative risk-adjusted returns in the first year after portfolio formation. However, the calibrated model predicts strong differences in the mispricing persistence of past-winners and losers. After one year, the alpha of past-losers is approximately zero (0.23 %/mo, t=0.85), while the alpha for past-winners is -0.75 %/mo (t=-5.82) over the following four years.

Keywords: overconfidence, information diffusion, bubbles, 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 (December 1, 2018). 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 Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

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