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The Contrarian Put

Author

Listed:
  • Fernando Chague

    (Sao Paulo School of Economics - FGV)

  • Bruno Giovannetti

    (Sao Paulo School of Economics - FGV)

  • Bernardo Guimaraes

    (Sao Paulo School of Economics - FGV)

Abstract

It is well-documented that retail investors like distressed stocks. We develop a quantitative model to study how this affects asset prices in equilibrium. We find that stocks will be overpriced even in normal times: in a distress scenario, the higher retail demand and short-selling costs yield a higher exit price for rational investors, effectively providing them with a put option. Our model is disciplined by a detailed dataset containing all retail trading and short-selling on OGX, a failed Brazilian oil giant popular among retail investors. We find that rational investors allow an overpricing of 6% in normal times because of the put option. The estimated average overpricing over almost two years is USD 1.7 billion.

Suggested Citation

  • Fernando Chague & Bruno Giovannetti & Bernardo Guimaraes, 2021. "The Contrarian Put," Discussion Papers 2106, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2106
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    References listed on IDEAS

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    More about this item

    Keywords

    retail investors; distressed firms; limits to arbitrage; behavioral biases; overpricing;
    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
    • G40 - Financial Economics - - Behavioral Finance - - - General

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