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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.

Suggested Citation

  • Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A Model of Investor Sentiment," Scholarly Articles 30747159, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:30747159
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