We study the investment behavior of foreign investors in association with an equity market liberalization, and find a strong link between foreigners trading and local market returns. In the period following the liberalization, net purchases by foreign investors induced a permanent increase in stock prices, suggesting that local firms reduced their cost of equity capital. We also find a strong l...

This paper examines the importance of the inclusion of buy-in data in analyzing the risk of investment in works of art. Using the data set of French Impressionist paintings brought to auction from 1985 to 2001, we construct a theoretical lognormal distribution to include the value of works that are bought in-house, and use this to examine bias in the pre-sale estimates of auction experts. It tu...

In the framework of a reduced form asset pricing model featuring linear-in-z betas and risk premiums with lagged macro instruments, I propose a clean measure of mispricing that is free from the omitted-variable bias due to either missing priced factors or missing instruments. Applying the model to U.S. stock returns for 1927-2005, I find that momentum and contrarian strategies are related to th...

This study proposes a new measure and test of herding which is based on the crosssectional dispersion of factor sensitivity of assets within a given market. This new measure enables us to evaluate the directions towards which the market may be herding and separate these from movements in fundamentals. We apply the test to an analysis of the US, UK, and South Korean stock markets and somewhat su...

We present results of an experiment on expectation formation in an asset market. Participants to our experiment must provide forecasts of the stock future return to computerized utility-maximizing investors, and are rewarded according to how well their forecasts perform in the market. In the Baseline treatment participants must forecast the stock return one period ahead; in the Volatility treat...

This paper presents evidence that the stock return premium associated with profitability is hard to reconcile with risk-based explanations but is consistent with expectation errors. Firms with lower pro tability are more volatile, su er greater drawdowns and are more sensitive to macroeconomic conditions. This means that the pro table rms are actually less risky by most measures and perform bet...

This paper advocates a theory of expectation formation that incorporates many of the central motivations of behavioral finance theory while retaining much of the discipline of the rational expectations approach. We provide a framework in which agents, in an asset pricing model, underparameterize their forecasting model in a spirit similar to Hong, Stein, and Yu (2005) and Barberis, Shleifer, an...

We study asset prices in an economy where some investors categorize risky assets into different styles and move funds among these styles depending on their relative performance. In our economy, assets in the same style comove too much, assets in different styles comove too little, and reclassifying an asset into a new style raises its correlation with that style. We also predict that style retu...

Market Stress and Herding* We propose a new approach to detecting and measuring herding which is based on the cross-sectional dispersion of the factor sensitivity of assets within a given market. This method enables us to evaluate if there is herding towards particular sectors or styles in the market including the market index itself and critically we can also separate such herding from common ...

This paper examines the stock market reactions to US biotech firms’ innovation news announcements during 1983-1993. Besides the positive abnormal returns observed during the announcement period, the paper identifies a medium-horizon negative drift in the stock price subsequent to firms’ innovative events. The observed negative drift is robust to the benchmarks and procedures used in calculating...