A Bayesian Approach to Excess Volatility, Short-term Underreaction and Long-term Overreaction During Financial Crises

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 16-003/III

Classification and Topics

• Classification: Wirtschaft ; Bayesian Analysis: General ; Financial Crises ; Portfolio Choice; Investment Decisions
• Subject: Bayesian model ; representative and conservative heuristics ; excess volatility ; underreaction ; overreaction ; magnitude effects ; financial crises

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Guo, Xu ; McAleer, Michael ; Wong, Wing-Keung ; Zhu, Lixing
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/130493
• Last update: 10.03.2025, 11:44 AM CET