The overpricing of popular high-risk stocks

65 Pages Posted: 24 Mar 2021 Last revised: 13 Oct 2021

See all articles by Fernando Chague

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Bruno Giovannetti

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Date Written: October 13, 2021

Abstract

We argue that the sheer rational expectation about some typical behaviors of retail investors can induce large and persistent overpricing in popular high-risk stocks. It is well-known that retail investors like distressed stocks. Hence, in a distress scenario, retail investors' increased demand, coupled with high short-selling costs, will allow agents to exit at higher prices, as if they had a put option. Anticipating this, rational investors agree to overpay in normal times. We develop a quantitative asset-pricing model and tightly calibrate it using detailed trading data on OGX, a failed Brazilian oil giant that was popular among retail investors. We estimate an overpricing of 6% well before distress hits, and an average overpricing of US$ 1.7 billion over almost two years.

Keywords: overpricing, misallocation, limits to arbitrage, behavioral biases, distressed firms, contrarian

JEL Classification: G12, G14, G40

Suggested Citation

Chague, Fernando and Giovannetti, Bruno and Guimaraes, Bernardo, The overpricing of popular high-risk stocks (October 13, 2021). Available at SSRN: https://ssrn.com/abstract=3787693 or http://dx.doi.org/10.2139/ssrn.3787693

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/fchague/

Bruno Giovannetti (Contact Author)

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva, 474
Sao Paulo
Brazil

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
155
Abstract Views
766
rank
238,130
PlumX Metrics