Template-Type: ReDIF-Paper 1.0
Author-Name: Guo, X.
Author-Name-Last: Guo
Author-Name-First: Xu
Author-Name: McAleer, M.J.
Author-Name-Last: McAleer
Author-Name-First: Michael
Author-Person: pmc90
Author-Name: Wong, W.-K.
Author-Name-Last: Wong
Author-Name-First: Wing-Keung
Author-Person: pwo79
Author-Name: Zhu, L.
Author-Name-Last: Zhu
Author-Name-First: Lixing
Title: A Bayesian Approach to Excess Volatility, Short-term Underreaction and Long-term Overreaction during Financial Crises
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 prop- erties 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.
Length: 26
Creation-Date: 2016-01-01
File-URL: https://repub.eur.nl/pub/79730/EI2016-01.pdf
File-Format: application/pdf
Series: RePEc:ems:eureir
Number: EI2016-01
Classification-JEL: C11, G01, G11
Keywords: Bayesian model, representative and conservative heuristics, excess volatility, underreaction, overreaction, magnitude effects, financial crises
Handle: RePEc:ems:eureir:79730