The Role of Surprise: Understanding Overreaction and Underreaction to Unanticipated Events using In-Play Soccer Betting Market
43 Pages Posted: 27 Feb 2012 Last revised: 27 Feb 2014
Date Written: February 9, 2013
Abstract
Previous research in finance has found evidences of both overreaction and underreaction to unanticipated events, but has yet to explain why investors overreact to certain events while underreacting to others. In this paper, we hypothesize that while market participants generally underreact to new events due to conservatism, the extent of underreaction is moderated by “surprise,” thus causing market participants to overreact to events that are highly surprising. We test our hypothesis using data from an in-play soccer betting market, where new events (goals) are clearly and exogenously defined, and the degree of “surprise” can be directly quantified (goals scored by underdogs are more surprising). We provide both statistical and economic evidences in support of our hypothesis.
Keywords: over/underreaction, unanticipated events, surprise, conservatism, prediction market, Bayesian dynamic model
JEL Classification: D84, G13, G14
Suggested Citation: Suggested Citation
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