While trading appears to be hazardous to most individual investors' wealth, some individual investors with well-functioning informational networks may be able to turn a profit. Indeed, we find that in the Chinese stock market, wealthy investors with portfolio values above the 99.5th percentile...

Presentation Slides for "Overconfidence, Arbitrage, and Equilibrium Asset Pricing" This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firmsapos prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are...

This paper sheds empirical light on whether sentiment affects the profitability of price momentum strategies. We hypothesize that news that contradicts investors' sentiment causes cognitive dissonance, which slows the diffusion of signals that oppose the direction of sentiment. This phenomenon...

We develop a model where overconfident investors overestimate their own signal quality but are skeptical of others'. Those investors who are initially uninformed believe that the early informed have learned little, leading the former investors to provide excess liquidity, which, in turn, causes...

The security market line (SML) accords with the capital asset pricing model (CAPM) by taking on an upward slope in pessimistic sentiment periods, but is downward sloping during optimistic periods. We hypothesize that this finding obtains because periods of optimism attract equity investment by...

High levels of turnover in financial markets are consistent with the notion that trading, like gambling, yields direct utility to some agents. We show that the presence of these agents attenuates covariance risk pricing and volatility, and implies a negative relation between volume and future...

How might markets exhibit both short-term reversals and longer-term momentum? Motivated by this question, we develop a dynamic model which includes noise traders and investors who underreact to signals that they do not themselves produce. Our setting implies the following: Return predictability...