Document Type

Journal Article

Department/Unit

Department of Economics

Language

English

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.

Keywords

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

Publication Date

2010

Source Publication Title

European Journal of Operational Research

Volume

203

Issue

1

Start Page

166

End Page

175

Publisher

Elsevier

Peer Reviewed

1

DOI

10.1016/j.ejor.2009.07.005

Link to Publisher's Edition

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

ISSN (print)

03772217

Included in

Economics Commons

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