This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. The Wisdom and Folly of Crowds
« Back to Results

The Wisdom and Folly of Crowds

Paper Session

Tuesday, Jan. 5, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: American Finance Association
  • Chair: Samuel Hartzmark, University of Chicago

Choosing to Disagree in Financial Markets

Snehal Banerjee
,
University of California-San Diego
Jesse Davis
,
University of North Carolina-Chapel Hill
Naveen Gondhi
,
INSEAD

Abstract

A large literature in psychology documents that people derive utility from their beliefs through the anticipation of future outcomes. We show that this leads to predictable deviations from rational expectations in financial markets: investors systematically choose to distort their interpretation of both private and price information. When aggregate risk tolerance is low, there exists a unique, symmetric equilibrium where investors optimally choose to exhibit overconfidence in their private information but dismiss the information in prices. However, when risk tolerance is sufficiently high, such symmetric equilibria do not exist. Instead, investors endogenously choose different interpretations: one type ignores the information in prices, while the other chooses to overweight the price signal. Our model predicts how diversity in investment strate- gies, return predictability, volatility and price informativeness can vary with economic conditions.

Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products

Brian Henderson
,
George Washington University
Neil Pearson
,
University of Illinois
Li Wang
,
Case Western Reserve University

Abstract

We use retail Structured Equity Product (SEP) issuances to construct a new sentiment measure for individual stocks. The SEP sentiment measure predicts negative abnormal returns on the SEPs’ reference stocks based on a variety of benchmarks including behavioral factor models and factors based on idiosyncratic volatility, short interest, and the 52-week high effect. Consistent with our interpretation that SEP issuances reflect investor sentiment, aggregate SEP issuances are highly correlated with the Baker-Wurgler sentiment index. Tobit regressions reveal that proxies for attention and sentiment predict demand for SEPs, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.

Social Proximity to Capital: Implications for Investors and Firms

Theresa Kuchler
,
New York University
Yan Li
,
City University of New York
Lin Peng
,
City University of New York
Johannes Stroebel
,
New York University
Dexin Zhou
,
City University of New York

Abstract

We use social network data from Facebook to show that institutional investors invest more in firms that are located in regions to which the investors have stronger social ties. This effect is distinct from the effect of geographic distance, and is particularly strong for small and informationally opaque firms. Consequently, we find that firms in regions that are more socially proximate to institutional capital have higher valuations and higher liquidity, especially when they are small or have low analyst coverage. Consistent with this cross-sectional result, liquidity was lower during Hurricane Sandy for firms that are socially proximate to institutional capital in the areas affected by Sandy. For investors, we find no evidence of differential returns to investments in socially connected areas, suggesting that investors do not obtain an informational advantage through friends as captured by Facebook. Our results suggest that the social structures of a region affect its firms' access to capital and thereby contributes to geographic differences in economic outcomes.

Sea Level Rise Exposure and Municipal Bond Yields

Paul Goldsmith-Pinkham
,
Yale University
Matthew Gustafson
,
Pennsylvania State University
Ryan Lewis
,
University of Colorado Boulder
Michael Schwert
,
University of Pennsylvania

Abstract

Municipal bond markets begin pricing sea level rise (SLR) exposure in 2013, coinciding with upward revisions of SLR projections. The effect is present across maturities, but larger for long-maturity bonds. We do not observe similar patterns using measures of immediate flood risk. We apply a structural model of credit risk to show that municipal bond investors expect a one standard deviation increase in SLR exposure to correspond to a reduction of 2% to 5% in the present value or an increase of 1% to 3% in the volatility of the local government cash flows supporting debt repayment.
Discussant(s)
Alexander Chinco
,
University of Illinois
David Solomon
,
Boston College
Arpit Gupta
,
New York University
Markus Baldauf
,
University of British Columbia
JEL Classifications
  • G1 - Asset Markets and Pricing