Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130493
Authors: 
Guo, Xu
McAleer, Michael
Wong, Wing-Keung
Zhu, Lixing
Year of Publication: 
2016
Series/Report no.: 
Tinbergen Institute Discussion Paper 16-003/III
Abstract: 
In this paper, we introduce a new Bayesian approach to explain some market anomalies during financial crises and subsequent recovery. We assume that the earnings shock of an asset follows a random walk model with and without drift to incorporate the impact of financial crises. We further assume the earning shock follows an exponential family distribution to take care of symmetric as well as asymmetric information. By using this model setting, we develop some properties on the expected earnings shock and its volatility, and establish properties of investor behavior on the stock price and its volatility during financial crises and subsequent recovery. Thereafter, we develop properties to explain excess volatility, short-term underreaction, long-term overreaction, and their magnitude effects during financial crises and subsequent recovery.
Subjects: 
Bayesian model
representative and conservative heuristics
excess volatility
underreaction
overreaction
magnitude effects
financial crises
JEL: 
C11
G01
G11
Document Type: 
Working Paper

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