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A decision-theoretic model of asset-price underreaction and overreaction to dividend news

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  • Alexander Ludwig
  • Alexander Zimper

Abstract

We combine new developments in decision theory with a standard consumption-based asset-pricing framework. In our model the efficient market hypothesis is violated if and only if agentsÂ’ beliefs’ express ambiguity about the stochastic process driving economic fundamentals. Asset price fluctuations result because agents with ambiguous beliefs are prone to a conÂ…firmatory bias in the interpretation […]

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  • Alexander Ludwig & Alexander Zimper, 2012. "A decision-theoretic model of asset-price underreaction and overreaction to dividend news," Working Papers 296, Economic Research Southern Africa.
    • Handle: RePEc:rza:wpaper:296
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    Cited by:

    1. Imane El Ouadghiri & Valérie Mignon & Nicolas Boitout, 2016. "On the impact of macroeconomic news surprises on Treasury-bond returns," Annals of Finance, Springer, vol. 12(1), pages 29-53, February.
    2. Zimper, Alexander, 2023. "Unrealized arbitrage opportunities in naive equilibria with non-Bayesian belief processes," Mathematical Social Sciences, Elsevier, vol. 125(C), pages 27-41.
    3. Giulio Bottazzi & Pietro Dindo & Daniele Giachini, 2019. "Momentum and reversal in financial markets with persistent heterogeneity," Annals of Finance, Springer, vol. 15(4), pages 455-487, December.

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    More about this item

    Keywords

    capital market; economic theory; investment;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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