Overconfidence, Information Diffusion, and Mispricing Persistence

58 Pages Posted: 11 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 Amsterdam - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: December 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.

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Suggested Citation

Daniel, Kent D. and Klos, Alexander and Rottke, Simon, Overconfidence, Information Diffusion, and Mispricing Persistence (December 2018). NBER Working Paper No. w25346. Available at SSRN: https://ssrn.com/abstract=3298824

Kent D. Daniel (Contact Author)

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://kentdaniel.net/

National Bureau of Economic Research (NBER)

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Alexander Klos

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

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Kiel, 24118
Germany

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

Simon Rottke

University of Amsterdam - Finance Group ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

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