When Markets Get Confused: Misperception versus Inventory 

with Olga Balakina, Claes Backman and Anastasiia Parakhoniak (November 2025)

This research project has been supported by the British Academy/Leverhulme Grant SRG1819

We examine episodes in which investors mistakenly trade similarly named stocks to identify short-term, non-fundamental pricing errors. Using a long time series and a broad cross-section of U.S. equities, we systematically document the frequency, magnitude, and market response to these “confusion events.” These incidents generate pronounced abnormal returns and wider effective spreads, consistent with transient mispricing. By exploiting confusion events as exogenous, we provide new causal evidence that such dislocations primarily arise from investor misperception rather than inventory frictions. Importantly, the two channels are not mutually exclusive but represent orthogonal sources of inefficiency—belief-driven demand shocks versus dealer balance-sheet constraints. We show that in normal conditions, the misperception channel dominates, whereas under systemic stress, inventory constraints become binding. This duality bridges behavioral and structural perspectives on market inefficiency and underscores that belief errors remain a pervasive driver of transient dislocations even in deep, liquid, and technologically advanced markets.

|SSRN |

Presented at finance seminars at Memphis University, SAFE Frankfurt University and Durham University Business School.