Optimists, Pessimists, and Stock Prices

Kent Daniel (), Alexander Klos and Simon Rottke
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Kent Daniel: National Bureau of Economic Research, Cambridge, Massachusetts, USA
Alexander Klos: Kiel University, Kiel, Germany
Simon Rottke: University of Amsterdam, Amsterdam, The Netherlands

Annual Review of Financial Economics, 2024, vol. 16, issue 1, 61-87

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.

Keywords: disagreement; share lending; short selling; mispricing (search for similar items in EconPapers)
JEL-codes: G12 G14 G40 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1146/annurev-financial-082123-105429

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