Bruno Cara Giovannetti
Associate Professor, Sao Paulo School of Economics - FGV
My research is in Finance, with a substantive focus on investors’ behavior and limits to arbitrage. In particular, I empirically investigate (i) how investors’ behavior can depart from rationality, (ii) how limits to arbitrage can occur, and (iii) how the interaction of (i) and (ii) can affect the stock market.
We argue that the sheer rational expectation about some typical behaviors of retail investors can induce large and persistent overpricing in popular high-risk stocks. It is well-known that retail investors like distressed stocks. Hence, in a distress scenario, retail investors' increased demand, coupled with high short-selling costs, will allow agents to exit at higher prices, as if they had a put option. Anticipating this, rational investors agree to overpay in normal times. We develop a quantitative asset-pricing model and tightly calibrate it using detailed trading data on OGX, a failed Brazilian oil giant that was popular among retail investors. We estimate an overpricing of 6% well before distress hits, and an average overpricing of US$ 1.7 billion over almost two years.
We first provide evidence of investor inattention to a very simple and well-known capital-gains tax exemption in the Brazilian stock market. We then show that tax-inattentive investors exhibit stronger behavioral biases and worse trading performance, even after controlling for several investor-level characteristics. The evidence is consistent with inattention being a common source of behavioral biases.
We show that a stock price fall, in itself, induces individual investors to buy the stock. Our identification strategy uses two distinct events which generate fictitious price falls. The first is the mechanical stock price adjustment on ex-dividend dates. The second explores the so-called left-digit effect, the well-documented empirical fact that individuals disproportionally focus on left digits. Buying after price falls with no further analysis is harmful to investors since price falls tend to be followed by further price falls.
"Price transparency in OTC equity lending markets: evidence from a loan fee benchmark" (with Fábio Cereda, Fernando Chague, Rodrigo De-Losso, and Alan de Genaro), forthcoming at the Journal of Financial Economics
"The short-selling skill of institutions and individuals" (with Fernando Chague and Rodrigo De-Losso) - Internet appendix, Journal of Banking and Finance, vol. 101, 77-91, 2019
"Well-connected short-sellers pay lower loan fees: a market-wide analysis" (with Fernando Chague, Rodrigo De-Losso, and Alan Genaro), Journal of Financial Economics, vol. 123, 646-670, 2017
Haralambos Simeonidis 2018 Prize for Best Paper Published by an Economist in Brazil
"Asset pricing under quantile utility maximization", Review of Financial Economics, 22: 169-179, 2013
Publications in Brazilian journals
"Attention-grabbing stocks and the behavior of individual investors in Brazil" (with Fernando Chague and Anthony Silva), Revista Brasileira de Finanças, 18(1), 1-22, 2020
SBFin 2020 Prize
"Variance premium and implied volatility in a low-liquidity option market" (with Eduardo Astorino, Fernando Chague, and Marcos Eugênio da Silva), Revista Brasileira de Economia, 71(1), 3–28, 2017
"Central bank communication affects the term-structure of interest rates" (with Fernando Chague, Rodrigo De-Losso, and Paulo Manoel), Revista Brasileira de Economia, 69(2), 147–162, 2015
Useful notes for Brazilian retail investors
Teaching (Ph.D. level)
Behavioral Finance (syllabus)
Here you find Brazilian financial data that we make available for research (risk factors, portfolios returns, etc)