| In chapter 1, I examine the implications of a false consensus effect in financial markets. I model a false consensus by assuming agents overestimate the correlation of their signal errors. I show that in markets where traders have a false consensus, rational expectations equilibria exhibit underreaction to news events. I also examine the implications of a false consensus among financial analysts. I show that in this setting, analysts who issue forecasts after observing other analysts' forecasts are more likely to issue forecasts too close to the mean of their prior. I empirically confirm this prediction.;In Chapter 2, my coauthors and I analyze the market's response to the buy recommendations of Jim Cramer on the CNBC show Mad Money. We find significant abnormal overnight returns following the recommendations. Using a novel dataset of television viewership, we find that the price response is increasing in the number of wealthy viewers who watch the show but unaffected by the number of low income households viewing the recommendations. Using data from an ECN, we show that the market's response to the recommendations is immediate even though the show airs after the NYSE's trading hours. These price spikes are followed by partial reversals, and short-selling is significantly higher than normal on the day following the recommendations. Equity lending rates are higher in the days following the recommendations, especially for stocks with the largest overnight returns, suggesting that short-selling does not completely eliminate the mispricing in part because it is costly for short-sellers to do so.;In Chapter 3, my coauthors and I use data from the Survey of Professional Forecasters to compare point predictions of GDP growth and inflation with the subjective probability distributions held by forecasters. We find that most SPF point predictions are quite close to the central tendencies of forecasters' subjective distributions. We also find that the deviations between point predictions and the central tendencies of forecasters' subjective distributions tend to be asymmetric, with SPF forecasters tending to report point predictions that give a more favorable view of the economy than do their subjective means/medians/modes. |
