Hard-to-Value Stocks, Behavioral Biases, and Informed Trading

Posted: 14 Mar 2008

See all articles by Alok Kumar

Alok Kumar

University of Miami - Miami Herbert Business School

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Abstract

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.

Suggested Citation

Kumar, Alok, Hard-to-Value Stocks, Behavioral Biases, and Informed Trading. Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1105521

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

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