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 journalJournal articlepeer-review

    54 Citations (Scopus)
    13 Downloads (Pure)

    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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