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A model of investor sentiment

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  • Barberis, Nicholas
  • Shleifer, Andrei
  • Vishny, Robert

Abstract

Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earning 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.
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Suggested Citation

  • Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
  • Handle: RePEc:eee:jfinec:v:49:y:1998:i:3:p:307-343
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