Overconfidence, Arbitrage, and Equilibrium Asset Pricing

Kent D. Daniel; David Hirshleifer; Avanidhar Subrahmanyam

doi:10.1111/0022-1082.00350

Journal of Finance Vol. 56 No. 3 2001

Overconfidence, Arbitrage, and Equilibrium Asset Pricing

Kent D. Daniel¹; David Hirshleifer^2,3; Avanidhar Subrahmanyam^4,5,6,7

¹ Kellogg's (Canada) · ² Fisher College · ³ The Ohio State University · ⁴ University of California, Los Angeles · ⁵ Cornell University · ⁶ Northwest University · ⁷ University of Hong Kong

Abstract

This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.

DOI: 10.1111/0022-1082.00350
Volume: 56
Issue: 3
Pages: 921-965
Language: en
Sources: openalex bibtex:phds-export.bib crossref

Overconfidence, Arbitrage, and Equilibrium Asset Pricing

Abstract

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