Guo, Xu McAleer, Michael Wong, Wing-Keung Zhu, Lixing
Year of Publication:
Tinbergen Institute Discussion Paper 16-003/III
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.
Bayesian model representative and conservative heuristics excess volatility underreaction overreaction magnitude effects financial crises