Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2016-01-15
Number: 16-003/III
Author-Name: Xu Guo
Author-Workplace-Name: Nanjing University of Aeronautics and Astronautics
Author-Name: Michael McAleer
Author-Workplace-Name: National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain
Author-Name: Wing-Keung Wong
Author-Workplace-Name: Hong Kong Baptist University, Hong Kong, PR China
Author-Name: Lixing Zhu
Author-Workplace-Name: Hong Kong Baptist University, Hong Kong, PR China
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 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.
Classification-JEL: C11, G01, G11
Keywords: Bayesian model; representative and conservative heuristics; excess volatility; underreaction; overreaction; magnitude effects; financial crises
File-Url: https://papers.tinbergen.nl/16003.pdf
File-Format: application/pdf
File-Size: 164211 bytes
Handle: RePEc:tin:wpaper:20160003