ECO331H1 Chapter Week 4: ECO331H1 Chapter Week : ECO331H1 Chapter : Week 4 Barberis, Schleifer, Vishny—A model of investor sentiment
Document Summary
Week 4: barberis, schleifer, vishny a model of investor sentiment. Empirical research shows security prices underreact to news over 1 to 12 month time horizon. Research shows over long horizons (three to five years), security prices overreact to consistent patterns of news pointing in same direction. Representativeness: tendency of experimental subjects to view events as typical or representative of some specific class and ignore laws of probability in process. There is positive autocorrelations in excess index returns over horizons of between one month and one year. Stocks with positive earnings surprises earn high returns in period prior to earnings announcement. Stocks with earnings surprises also earn higher returns in period after portfolio formation. Information about earnings slowly incorporated into stock prices. Earnings changes exhibit slight trend at one, two, and three quarter horizons and slight reversal after a year. Market participants do not recognize positive autocorrelations in earnings changes and believe random walk.
