Optimists, pessimists and stock prices

Annual Review of Financial Economics, in press

29 Pages Posted: 8 Feb 2024

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

Date Written: June 08, 2024

Abstract

We review the academic findings from psychology and economics on disagreement, and specifically on the effect of disagreement on asset prices. We discuss measurement of disagreement, and how disagreement coupled with constraints on short selling can sideline pessimistic investors and result in overpricing. We review the literature on short selling in financial markets, paying particular attention to how and why some issues become "hard-to-borrow", what factors go into the determination of borrowing costs, and discuss the evolution of borrowing costs over the last several decades. We show how an examination of the prices and borrowing costs for constrained stocks can lead to an improved understanding of how disagreement in financial markets arises and is resolved, and finally discuss directions for future research.

Keywords: disagreement, share lending, short-selling, mispricing

JEL Classification: G02, G12

Suggested Citation

Daniel, Kent D. and Klos, Alexander and Rottke, Simon, Optimists, pessimists and stock prices (June 08, 2024). Annual Review of Financial Economics, in press
, Available at SSRN: https://ssrn.com/abstract=4700311 or http://dx.doi.org/10.2139/ssrn.4700311

Kent D. Daniel

Columbia University - Columbia Business School, Finance ( email )

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

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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