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Behavioral Finance: Financial Market Anomalies and a Nobel Prize

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Regency AB
Hosted By: American Finance Association
  • Chair: Tobias Moskowitz, Yale University

Short and Long Horizon Behavioral Factors

Kent Daniel
,
Columbia University
David Hirshleifer
,
University of California-Irvine
Lin Sun
,
Florida State University

Abstract

Recent theories suggest that both risk and mispricing are associated with commonality in security returns, and that the loadings on characteristic-based factors can be used to predict future returns. We offer a parsimonious model which features: (1) a factor motivated by limited attention that is dominant in explaining short-horizon anomalies, and (2) a factor motivated by overconfidence that is dominant in explaining long-horizon anomalies. Our three-factor risk-and-behavioral composite model outperforms both standard models and recent prominent factor models in explaining a large set of robust return anomalies.

Complexity Aversion When Seeking Alpha

Tarik Umar
,
Rice University

Abstract

I provide evidence that news’ complexity and sentiment affect investor attention to news and market reactions. Using field data with randomization from Seeking Alpha, I find standard-deviation increases in headline length (negativity) lead to 12%-fewer (2%-more) views. Effects are greater for less-sophisticated investors. Studying company-earnings-press-release headlines, and using the length of firms’ legal names to instrument headline lengths, I find standard-deviation increases in length lead to 7%-lower turnover, 60-basis-points-tighter-intraday-price ranges, and 15-basis-points-return underreactions, which reverse in three months. Complexity matters more for less-surprising news released on quieter days to less-sophisticated investors.

Sticky Expectations and the Profitability Anomaly

Jean-Philippe Bouchaud
,
Capital Fund Management
Philipp Krueger
,
University of Geneva and SFI
Augustin Landier
,
Toulouse School of Economics
David Thesmar
,
Massachusetts Institute of Technology

Abstract

We propose a theory of one of the most economically significant stock market anomalies, i.e. the ``profitability'' anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average more pessimistic for high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

Discussion of the 2017 Nobel Prize in Economics and Richard Thaler’s Impact on Financial Markets

Abstract

TBD
Discussant(s)
Robert Stambaugh
,
University of Pennsylvania
Marina Niessner
,
Yale University
Andrea Frazzini
,
AQR Capital Management, LLC
Tobias Moskowitz
,
Yale University
Kent Daniel
,
Columbia University
JEL Classifications
  • G1 - General Financial Markets