A Model of Investor Sentiment
Posted: 19 Feb 1997
Date Written: Undated
Recent empirical research inn finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements; and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment - that is, of how investors form beliefs - that is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation