Document Type

Journal Article

Department/Unit

Department of Economics

Abstract

This paper develops a model of weight assignments using a pseudo-Bayesian approach that reflects investors’ behavioral biases. In this parsimonious model of investor sentiment, weights induced by investors’ conservative and representative heuristics are assigned to observations of the earning shocks of stock prices. Such weight assignments enable us to provide a quantitative link between some market anomalies and investors’ behavioral biases. The seriousness of an anomaly can be quantitatively assessed by investigating into its dependency on weights. New results other than the short-run underreaction and long-run overreaction can be derived and new hypotheses can be formed.

Publication Year

2010

Journal Title

European Journal of Operational Research

Volume number

203

Issue number

1

Publisher

Elsevier

First Page (page number)

166

Last Page (page number)

175

Referreed

1

DOI

10.1016/j.ejor.2009.07.005

ISSN (print)

0377-2217

Link to Publisher’s Edition

http://dx.doi.org/10.1016/j.ejor.2009.07.005

Keywords

Bayesian model, Representative and conservative heuristics, Underreaction, Overreaction, Stock price, Stock return

Included in

Economics Commons

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