Investment Opportunities Offered by Investor Emotions

Recent studies suggest that investor emotions might cause securities to be mispriced. We build an investment strategy around the mispricing opportunities identified in two papers that have examined how emotions influence investor reaction to earnings announcements. This strategy proves to be highly profitable, even after taking account of the associated transactions costs and risks of implementation. Our findings also provide additional insights into both the magnitude and nature of the mispricings attributable to the influence that emotions have on investor decision-making.