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Hard-to-value stocks, behavioral biases, and informed trading

journal contribution
posted on 2009-12-01, 00:00 authored by A Kumar
This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors’ behavioral biases and that relatively better informed investors attempt to exploit those biases.

History

Journal

Journal of financial and quantitative analysis

Volume

44

Pagination

1375-1401

Location

Cambridge, Eng.

ISSN

0022-1090

eISSN

1756-6916

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2009, Michael G. Foster School of Business, University of Washington

Issue

06

Publisher

Cambridge University Press