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Does investor short-horizon affect stock mispricing? An empirical study based on higher order expectation theory

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  • Gao, Tao
  • Cui, Xiaolei
  • Xu, Longbing

Abstract

Using a unique dataset of 11.58 million Chinese investor accounts, we link investor horizons to stock mispricing through higher-order expectations theory. Short-term investors coordinate their trading around public signals, resulting in mispricing. Mechanism tests reveal that short-term investors rely on higher-order expectations (expectations about the expectations of others) rather than fundamentals when making investment decisions. Further analysis reveals that public signals reduce fundamental disagreement but heighten price disagreement, thereby exacerbating mispricing. These findings offer theoretical insights into investor behavior, support the development of behavioral regulations for capital markets, and propose a strategy yielding 7.77% annualized returns.

Suggested Citation

  • Gao, Tao & Cui, Xiaolei & Xu, Longbing, 2025. "Does investor short-horizon affect stock mispricing? An empirical study based on higher order expectation theory," Finance Research Letters, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:finlet:v:79:y:2025:i:c:s1544612325004659
    DOI: 10.1016/j.frl.2025.107202
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    More about this item

    Keywords

    Investor short-horizon; Higher order expectations; Keynesian beauty contest; Mispricing;
    All these keywords.

    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
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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