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The Barberis Thaler survey discusses belief-based models with
institutional friction. Subrahmanyam s treatment of this issue mentions
the work of Baker and Stein (2004). Baker and Stein argue that opti-
mistic investors generate volume, producing a negative relation between
returns and past volume. Notably, the optimism is reversed in subse-
quent periods. However, because of short-selling constraints, pessimism
is not adequately reflected in stock prices.
40 Survey of Surveys
In cross-sectional regressions, stocks of small firms which have low
analyst following appear to feature greater mispricing in terms of
return predictability from book-to-market and momentum. (Zhang,
2006). There is evidence that mispricing is most severe for stocks where
institutional ownership is lowest (Nagel, 2005) who suggests that insti-
tutional ownership is a proxy for short-selling constraints, in that short-
selling is typically cheaper for institutions.
Some findings appear to lack mutual consistency. Subrahmanyam
mentions a finding by Hvidkjaer (2006) whereby on net, small investors
buy loser momentum stocks and subsequently become net sellers in
these stocks. This suggests that they may create momentum by under-
reacting to negative information. Yet, Hvidkjaer (2005) reports a nega-
tive relationship between trade imbalances of small investors and future
stock returns in the cross-section. This result is consistent with an
overreaction effect by small investors, followed by the reversal of their
sentiment, thereby generating stock return predictability.
Subrahmanyam discusses several papers concerning one of the cen-
tral claims made in the behavioral finance literature, namely that
investors who are imperfectly irrational are able to persist in the long
run. The specific papers he mentions in this regard are DeLong et al.
(1991), which is the seminal work mentioned earlier on this point, Kyle
and Wang (1997), and Hirshleifer et al. (2006).
2.4.2 Other Psychological Influences on Returns
As was mentioned in Hirshleifer s survey, Griffin and Tversky (1992)
provide a psychological theory based on weight and strength explain-
ing why some situations feature underweighting of base rates, whereas
other situations feature overweighting of base rates. Sorescu and Sub-
rahmanyam (2006) test the argument that investors overreact to the
strength of a signal and underreact to its weight. They proxy weight by
analyst experience and strength by the number of categories spanned
by analyst revisions. Doing so, they find some support for the Griffin
and Tversky hypothesis.
Hirshleifer s survey mentions the role of emotions, especially mood,
on returns. For example, consider the possibility that mood is positively
2.4 Subrahmanyam (2007): Additional Perspectives 41
correlated with exposure to sunlight. A study by Saunders (1993) doc-
uments that stock returns on the New York Stock Exchange tend to be
positive on sunny days but mediocre on cloudy days. Extending this
study to a number of international markets, Hirshleifer and Shumway
(2003) confirm this finding. At the same time, Goetzmann and Zhu
(2005) find little evidence that the return pattern stems from individ-
ual investors trading patterns.
A related approach focuses on seasonal affective disorder (SAD).
Kamstra et al. (2000) focus on returns for weekends involving the switch
from daylight savings time to standard time. They find these returns
to be very negative, and suggest that the cause is induced depression
of investors subject to SAD. In a different type of mood study, Edmans
et al. (2007) study how stock market returns in a country are impacted
by the outcomes of sporting events involving that country. They find
that returns are positive when the outcome is positive and vice versa.
Although Subrahmanyam does not mention it explicitly, mood has also
become a specific object of study in the neurofinance literature: see
Knutson and Kuhnen (2009).
In discussing the disposition effect, Subrahmanyam describes a
comprehensive study of trading activity by Grinblatt and Keloharju
(2001b). They confirm the disposition effect in Finnish data. Finnish
data is exceptionally rich, in that it is comprehensive on an account
and trade-by-trade basis. Kaustia (2004) also provides insight into the
disposition effect by focusing on IPO markets. The idea is that because
the offer price is a common purchase price, the disposition effect will be
clearly identifiable. Kaustia finds that volume is lower when the stock
price is below the offer price. He also finds that there is a sharp upsurge
in volume after the price rises above the offer price for the first time.
As to diversification, Goetzmann and Kumar (2008) find that
the portfolios held by individual investors who are young and less
wealthy are less diversified than older, more wealthy investors. In sup-
port of the familiarity hypothesis, Frieder and Subrahmanyam (2005)
present evidence that individual investors prefer stocks with high brand
recognition.
Poteshman and Serbin (2003) present evidence that option investors
do not optimally exercise options. For example, they exercise options
42 Survey of Surveys
when they should instead sell them. Both Stein (1989) and Potesh-
man (2001) report that options implied volatility appears to reflect
short-term overreaction. Evidence presented by Bakshi et al. (2000) [ Pobierz całość w formacie PDF ]