A pseudo-Bayesian model in financial decision making with implications to market volatility, under- and overreaction

Kin Lam, Taisheng Liu, Wing Keung WONG*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

38 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)166-175
Number of pages10
JournalEuropean Journal of Operational Research
Volume203
Issue number1
DOIs
Publication statusPublished - 16 May 2010

Scopus Subject Areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

User-Defined Keywords

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

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