Arbitrage and Finance. Sendhil Mullainathan Economics 2030 Fall Lecture 5. Overview. Limits of Aribitrage Structure of mis -pricings Bubbles Equity Premium puzzle Volume . Overview. Limits of Aribitrage Structure of mis -pricings Bubbles Equity Premium puzzle Volume .
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Arbitrage and Finance
Sendhil Mullainathan
Economics 2030
Fall Lecture 5
Behavioral Models
Barberis, Shleifer and Vishny (1998)
Short-term gambler’s fallacy. Updating leads to long-term hot-hand belief.
Daniel, Hirshleifer and Subrahmanyam (1998)
A mix of biases
Confirmation(self-serving bias) leads to short-term under-reaction
Long-term over-reaction occurs because of correction
This is an odd feature of these results.
Hong-Stein
Limited attention and two types of traders: fundamentals and trend-chasers
But information diffuses slowly. So diffusion creates trends which trend-chasers over extrapolate
Basic idea
Suppose expected utility tomorrow also affects utility today