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Optimists, Pessimists, and Stock Prices

Author

Listed:
  • Kent Daniel

    (National Bureau of Economic Research, Cambridge, Massachusetts, USA
    Columbia Business School, New York, NY, USA)

  • Alexander Klos

    (Kiel University, Kiel, Germany)

  • Simon Rottke

    (University of Amsterdam, Amsterdam, The Netherlands)

Abstract

We review the academic findings from psychology and economics on disagreement—specifically, the effect of disagreement on asset prices. We discuss measurement of disagreement and how disagreement, coupled with constraints on short selling, can sideline pessimistic investors and result in overpricing. We review the literature on short selling in financial markets, paying particular attention to how and why some issues become hard-to-borrow and what factors go into the determination of borrowing costs, and we discuss the evolution of borrowing costs over the last several decades. We show how an examination of the prices and borrowing costs for constrained stocks can lead to an improved understanding of how disagreement in financial markets arises and is resolved, and we discuss directions for future research.

Suggested Citation

  • Kent Daniel & Alexander Klos & Simon Rottke, 2024. "Optimists, Pessimists, and Stock Prices," Annual Review of Financial Economics, Annual Reviews, vol. 16(1), pages 61-87, November.
    • Handle: RePEc:anr:refeco:v:16:y:2024:p:61-87
    DOI: 10.1146/annurev-financial-082123-105429
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

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