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Pricing anomalies in a general equilibrium model with biased learning

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  • Antico, Andrea
  • Bottazzi, Giulio
  • Giachini, Daniele

Abstract

We investigate the emergence of momentum and reversal anomalies in a general equilibrium model with complete markets and cognitively biased agents. General equilibrium and market completeness avoid spurious effects due to portfolio composition or price stickiness. Taking inspiration from and merging different strands of empirical literature, we try to identify anomalies in the most general way, studying return autocorrelation patterns, price gaps following sequences of specific events, and relative performances of suitably defined portfolios. We show that these three characterizations are not equivalent. They capture different aspects of mispricing and relate differently to the behavioral characteristics of the agents. Often, similar anomalous patterns struggle to coexist under seemingly related biases. Overall, the model is generically able to reproduce the empirical evidence of momentum profits that subsequently revert.

Suggested Citation

  • Antico, Andrea & Bottazzi, Giulio & Giachini, Daniele, 2025. "Pricing anomalies in a general equilibrium model with biased learning," Journal of Behavioral and Experimental Finance, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:beexfi:v:45:y:2025:i:c:s2214635025000085
    DOI: 10.1016/j.jbef.2025.101027
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    More about this item

    Keywords

    Momentum; Reversal; Biased learning; Bayesian learning; Model misspecification;
    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
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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