The Contrarian Put

Fernando Chague, Bruno Giovannetti and Bernardo Guimaraes

No 2106, Discussion Papers from Centre for Macroeconomics (CFM)

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.

Keywords: retail investors; distressed firms; limits to arbitrage; behavioral biases; overpricing (search for similar items in EconPapers)
JEL-codes: G12 G14 G40 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2021-02
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2106

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