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A pseudo-Bayesian model in financial decision making with implications to market volatility, under- and overreaction. (English) Zbl 1176.91163

Summary: 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.

MSC:

91G70 Statistical methods; risk measures
91G50 Corporate finance (dividends, real options, etc.)
62P05 Applications of statistics to actuarial sciences and financial mathematics
91B84 Economic time series analysis
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