Predicting the Next Step of a Random Walk: Experimental Evidence of Regime-Shifting Beliefs

35 Pages Posted: 20 Apr 2001

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jeffrey Hales

University of Texas at Austin - Department of Accounting

Date Written: February 8, 2001

Abstract

Two experiments with MBA-student participants support Barberis, Shleifer, and Vishny's (1998) prediction that investors expect random-walk sequences to shift between continuation regimes (in which changes tend to be followed by like changes) and reversal regimes (in which changes tend to be followed by reversing changes). As predicted, investors overreacted to changes that were preceded by many continuations, and underreacted to changes that were preceded by many reversals. We conclude that regime-shifting models can provide a useful framework for understanding market anomalies, including underreactions to earnings changes and overreactions to long-term earnings trends.

Keywords: Behavioral Finance, Regime Shifting, Post-Earnings-Announcement Drift, Momentum, Market Efficiency

JEL Classification: G14, M4, C91

Suggested Citation

Bloomfield, Robert J. and Hales, Jeffrey, Predicting the Next Step of a Random Walk: Experimental Evidence of Regime-Shifting Beliefs (February 8, 2001). Available at SSRN: https://ssrn.com/abstract=259309 or http://dx.doi.org/10.2139/ssrn.259309

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Jeffrey Hales

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-2163 (Phone)
512-471-3907 (Fax)

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