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Managing Overreaction During a Run

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  • Machado, Caio

Abstract

This paper studies whether suspensions intended to provide a time-out for agents to digest incoming information attenuate runs, under the assumption that agents overreact to news and need time to properly process it. To do so, I embed diagnostic expectations into a standard global game model of runs. I show that during bad times, when bad public news arrives and/or investment returns are low, such policy actually amplifies runs, even in cases where almost all investors are receiving negative news and temporarily overreacting to it. During good times, the opposite result arises.

Suggested Citation

  • Machado, Caio, 2023. "Managing Overreaction During a Run," MPRA Paper 117896, University Library of Munich, Germany, revised 08 Jul 2023.
    • Handle: RePEc:pra:mprapa:117896
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    References listed on IDEAS

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    More about this item

    Keywords

    global games; overreaction; diagnostic expectations; runs;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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