Beauty Contests and Higher Order Beliefs: Evidence from News Releases

Posted: 4 Mar 2024 Last revised: 11 Apr 2024

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Bin Miao

The Chinese University of Hong Kong, Shenzhen

Joonki Noh

Case Western Reserve University - Department of Banking & Finance

Date Written: February 15, 2024

Abstract

This paper provides evidence consistent with the impact of beauty contest driven higher order beliefs (HOBs) on stock returns. Consistent with theories, HOB motivated speculators exploit naïve news-chasing investors, and this leads to a wedge between prices and the consensus fundamental value. Speculation in overpriced stocks following high sentiment news releases, exacerbates the overpricing. This exacerbation of overpricing is subsequently reversed. In addition, the asymmetric impact of high and low sentiment news on overpriced stocks is driven by more positive news being produced in recent years and investors paying more attention to overpriced stocks.

Keywords: Beauty contest, Higher order beliefs, News releases, Mispricing, High frequency trading, Low latency trading

JEL Classification: G11, G12, G14, G15, G41

Suggested Citation

Chordia, Tarun and Miao, Bin and Noh, Joonki, Beauty Contests and Higher Order Beliefs: Evidence from News Releases (February 15, 2024). Available at SSRN: https://ssrn.com/abstract=4728347 or http://dx.doi.org/10.2139/ssrn.4728347

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Bin Miao

The Chinese University of Hong Kong, Shenzhen ( email )

Joonki Noh (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3737 (Phone)

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