The Dynamics of Disagreement
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.
The Cross-Section of Risk and Returns
Savings and Consumption When Children Move Out
Streaks in Daily Returns
Streaks in returns, which we define as n-day consecutive over-/under-performance relative to the market, predict future daily returns. A value-weighted portfolio buying stocks with negative streaks and selling stocks with positive streaks yields annualized Sharpe ratios around 2. We successfully replicate the result in international equity markets and find low correlations across regions. Predictability is robust among the largest (market capitalization above the 50% or 80% NYSE quantiles) and most liquid stocks (low quoted bid-ask spread or Amihud measure tercile). A model of short-term return extrapolation among investors generates predictions consistent with the empirical findings.