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Psychological Aspects of Large Stock Price Changes

In: Behavioral Finance The Coming of Age

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  • Andrey Kudryavtsev

Abstract

Large stock price changes are supposed to be a result of considerable company-specific shocks. Yet, actual stock price reactions to these shocks crucially depend on the way investors subjectively treat them, and therefore may be affected by various psychological factors. In this chapter, I sketch the picture emerging from two studies of mine dealing with psychological aspects of the large stock price changes and the subsequent stock returns. These studies demonstrate that stock returns following an initial price shock are significantly related to the direction of the contemporaneous stock market index return and of the contemporaneous change in the value of VIX index on the day when the shock takes place. I attribute these findings to the effects of the availability heuristic and mood on investors’ behavior.

Suggested Citation

  • Andrey Kudryavtsev, 2019. "Psychological Aspects of Large Stock Price Changes," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 12, pages 401-427, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813279469_0012
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    Keywords

    Behavioral Economics; Behavioral Finance; Behavioral Macro-Finance; Decision Making; Disposition Effect; Financial Crisis; Financial Decision-Making; Financial Market Anomalies; Fintech; Gender Differences; Heuristics; Information Processing Style; International Contagion Market Design; Monetary Policy; Mood; Optimal Portfolio; Overreaction; Peer-to-Peer Lending; Political Economics; Time Pressure; Transparency;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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