Overconfidence, Information Diffusion, and Mispricing Persistence

Daniel, Kent; Klos, Alexander; Rottke, Simon

doi:10.2139/ssrn.3294053

Cited by 3 publications

(3 citation statements)

References 101 publications

(133 reference statements)

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“…As we show in Section V.A, in our data there is also some short‐term underreaction, but at the long horizons of long‐term growth (LTG) forecasts overreaction prevails. Daniel, Klos, and Rottke () find that stocks featuring high dispersion in analyst expectations and high illiquidity earn high returns, but do not offer a theory of expectations and their dispersion.…”

mentioning

confidence: 99%

Diagnostic Expectations and Stock Returns

Bordalo¹,

Gennaioli²,

Porta³

et al. 2019

The Journal of Finance

255

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We revisit La Porta's finding that returns on stocks with the most optimistic analyst long‐term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data.

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confidence: 99%

Diagnostic Expectations and Stock Returns

Bordalo¹,

Gennaioli²,

Porta³

et al. 2019

The Journal of Finance

255

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show abstract

“…Another possible explanation stems from the perspective of short-sale constraints. Daniel et al (2018) argued that short-sale is not available for most of the small stocks, causing newswatchers unable to sell momentum losers. Therefore, momentum effect ceases to hold due to the lack of short-term market under-reaction.…”

Section: Fixed Incomementioning

confidence: 99%

Momentum and the Cross-Section of Stock Volatility

Fan

Kearney²,

et al. 2020

SSRN Journal

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“…4 Among the advantages of the HS model is evidence of gradual-information-diffusion, shown in empirical results that the information is more slowly diffused among small firms (e.g., Thomas (1989, 1990)) and firms with lower analysts' coverage (e.g., Hong et al (2000)). In addition, the heterogeneous agent model can be adapted to explain short-sale constraints (e.g., Daniel et al (2019)). However, analyzing this model would require information on the market expectations, especially newswatchers' expectations, which are, by definition, unobservable.…”

Section: Introductionmentioning

confidence: 99%

Analysts' Underreaction and Momentum Strategies.

Azevedo¹

2020

Preprint

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Motivated by the Hong and Stein (HS 1999) model, I test whether the newswatchers' underreaction explains the abnormal variation of stock prices driven by the momentum effect. I rely on analysts' consensus estimates as a proxy for newswatchers' expectations to propose a parsimonious estimate of analysts' predictable underreaction (APU). The results show that APU strongly predicts analysts' revisions, analysts' errors and, more importantly, stock returns. A long-short strategy based on APU generates a value-weighted Fama and French six-factor alpha of 0.96% per month (t-stat of 3.66). Furthermore, I propose an underreaction factor that subsumes the momentum factor in spanning tests and can better explain alternative specifications of earnings and returns momentum. The results support the HS model and APU's use as a proxy for newswatchers' underreaction by showing that underreaction and overreaction are part of a unified theory.

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Overconfidence, Information Diffusion, and Mispricing Persistence

Abstract: for helpful comments as well as Zahi Ben-David, Sam Hanson and Byoung Hwang for helpful insights about the short-interest data.

Cited by 3 publications

References 101 publications

Diagnostic Expectations and Stock Returns

Diagnostic Expectations and Stock Returns

Momentum and the Cross-Section of Stock Volatility

Analysts' Underreaction and Momentum Strategies.

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