Overconfidence, Information Diffusion, and Mispricing Persistence

58 Pages Posted: 11 Dec 2018 Last revised: 4 Apr 2021

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia University - Columbia Business School, Finance; 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; Tinbergen Institute

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.

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 University - Columbia Business School, Finance ( email )

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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