Abstract

http://ssrn.com/abstract=1836932
 
 

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A New Pseudo Bayesian Model for Stock Returns In Financial Crisis


Wing-Keung Wong


Hong Kong Baptist University (HKBU)

Eric Fung


Hong Kong Baptist University (HKBU) - Department of Mathematics

Kin Lam


Hong Kong Baptist University (HKBU)

Tak-Kuen Siu


Macquarie University, Faculty of Business and Economics

May 9, 2011


Abstract:     
Barberis, Shleifer and Vishny (1998) and others have developed Bayesian models to explain investors' behavioral biases by using the conservatism heuristics and the representativeness heuristics in making decisions. To extend their work, Lam, Liu, and Wong (2010) have developed 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. This paper extends their work further by developing properties for the stock return during financial crisis and recovery from the crisis, which could then be used to study some market anomalies including short-term underreaction, long-term overreaction, and excess volatility during financial crisis. We also explain in details the linkage between these market anomalies and investors' behavioral biases during financial crisis.

Number of Pages in PDF File: 27

Keywords: Bayesian Model, Representative and Conservative Heuristics, Underreaction, Overreaction, Stock Price, Stock Return, Financial Crisis

JEL Classification: G11, C13

working papers series


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Date posted: May 12, 2011 ; Last revised: May 25, 2011

Suggested Citation

Wong, Wing-Keung and Fung, Eric and Lam, Kin and Siu, Tak-Kuen, A New Pseudo Bayesian Model for Stock Returns In Financial Crisis (May 9, 2011). Available at SSRN: http://ssrn.com/abstract=1836932 or http://dx.doi.org/10.2139/ssrn.1836932

Contact Information

Wing-Keung Wong (Contact Author)
Hong Kong Baptist University (HKBU) ( email )
Kowloon
Hong Kong
Eric Fung
Hong Kong Baptist University (HKBU) - Department of Mathematics ( email )
Kowloon Tong
Hong Kong
Hong Kong
Kin Lam
Hong Kong Baptist University (HKBU) ( email )
Department of Finance and Decision Sciences Renfrew Road
Kowloon
HONG KONG
00 852 2339 5007 (Phone)
00 852 2339 5585 (Fax)
Tak-Kuen Siu
Macquarie University, Faculty of Business and Economics
Australia
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