QBER - Institute for Quantitative Business and Eco
24118 Kiel, Germany
Institutional Affiliation: Christian-Albrechts-Universität zu Kiel
NBER Working Papers and Publications
|December 2018||Overconfidence, Information Diffusion, and Mispricing Persistence|
with Kent Daniel, Simon Rottke: w25346
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.