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Overreaction to extreme market events and investor sentiment

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  • Pedro Piccoli
  • Mo Chaudhury

Abstract

This article investigates the role of investor psychology, captured here by investor sentiment index, in driving individual stock price reactions to extreme movements in the broader market. In addition to confirming prior evidence of overreaction, we find much stronger overreaction when investor sentiment is low rather than high. This is consistent with the role of the contrast dimension of an uncommon event, suggested in the psychology literature, over and above the emotion of surprise it brings about. In a low sentiment environment, the contrast is sharper and hence leads to stronger overreaction.

Suggested Citation

  • Pedro Piccoli & Mo Chaudhury, 2018. "Overreaction to extreme market events and investor sentiment," Applied Economics Letters, Taylor & Francis Journals, vol. 25(2), pages 115-118, January.
    • Handle: RePEc:taf:apeclt:v:25:y:2018:i:2:p:115-118
    DOI: 10.1080/13504851.2017.1302052
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    Cited by:

    1. Yousaf, Imran & Youssef, Manel & Goodell, John W., 2022. "Quantile connectedness between sentiment and financial markets: Evidence from the S&P 500 twitter sentiment index," International Review of Financial Analysis, Elsevier, vol. 83(C).
    2. Szymon Lis, 2022. "Investor Sentiment in Asset Pricing Models: A Review," Working Papers 2022-14, Faculty of Economic Sciences, University of Warsaw.

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