Predicting the Next Step of a Random Walk: Experimental Evidence of Regime-Shifting Beliefs
35 Pages Posted: 20 Apr 2001
Date Written: February 8, 2001
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: Suggested Citation