behavioralfinance.pptVIP

* Overconfidence Daniel , Hirshleifer, and Subrahmanyam (DHS, JF, 1998): overconfidence and market under- and overreactions Three kinds of signals D1: noisy private signal D2: noisy public signal D3: conclusive public signal (liquidation day) OC investors overestimate the precision of their private information, but not of the public information received. They overreact to private signals, but underreact to public signals. Overconfidence DHS, JF, 1998 * * Overconfidence DHS (JF, 1998): overconfidence could explain: short-term momentum (positive short-term autocorrelation of stock returns); long-term reversal (negative autocorrelation of short-term returns) high volatility of asset prices relative to fundamentals. * Overconfidence Barber and Odean (2001, JF): Boys will be boys! Overconfident investors will trade too much. Psychological research: men are more prone to overconfidence than women. Empirical test design: use gender as a proxy for different degree of overconfidence; exam the trading behavior of investors based on account data from a large discount brokerage Do men trade more frequently than women? YES! Men trade 45% more than women. Single men trade 67% more than single women. Overconfidence hurts performance. Overconfidence Barber and Odean (2001, JF) * Noise Traders Noise traders are a group of investors that are not fully rational. These investors could subject to a range of psychological/recognition biases, including overconfidence. The trading of these investors are heavily influenced by sentiment. * Noise Traders DeLong, Shleifer, Summers, and Waldman (1990, JPE): noise trader risk in the financial markets Noise traders are affected by noise trader sentiment. Bullish sentiment drives up stock prices, while bearish sentiment works in the opposite direction. The sentiment fluctuates over time and is unpredictable. The unpredictability of noise trader sentiment imposes more price uncertainty on assets. Assets that are heavily traded by noise traders