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The Dynamics of Disagreement

Author

Listed:
  • Kent Daniel
  • Alexander Klos
  • Simon Rottke

Abstract

In this paper, we infer how the estimates of firm value by “optimists” and “pessimists” evolve in response to information shocks. Specifically, we examine returns and disagreement measures for portfolios of short-sale-constrained stocks that have experienced large gains or large losses. Our analysis suggests the presence of two groups, one of which overreacts to new information and remains biased over about 5 years, and a second group, which underreacts and whose expectations are unbiased after about 1 year. Our results have implications for the belief dynamics that underlie the momentum and long-term reversal effect.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Kent Daniel & Alexander Klos & Simon Rottke, 2023. "The Dynamics of Disagreement," The Review of Financial Studies, Society for Financial Studies, vol. 36(6), pages 2431-2467.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:6:p:2431-2467.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac075
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    Citations

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    Cited by:

    1. Hanauer, Matthias X. & Lesnevski, Pavel & Smajlbegovic, Esad, 2023. "Surprise in short interest," Journal of Financial Markets, Elsevier, vol. 65(C).
    2. Rob Bauer & Katrin Gödker & Paul Smeets & Florian Zimmermann, 2024. "Mental Models in Financial Markets: How Do Experts Reason about the Pricing of Climate Risk?," CESifo Working Paper Series 11149, CESifo.
    3. Rob Bauer & Katrin Gödker & Paul Smeets & Florian Zimmermann, 2024. "Mental Models in Financial Markets: How Do Experts Reason About the Pricing of Climate Change?," CRC TR 224 Discussion Paper Series crctr224_2024_569, University of Bonn and University of Mannheim, Germany.

    More about this item

    JEL classification:

    • G4 - Financial Economics - - Behavioral Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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