Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model
2000; RELX Group (Netherlands); Linguagem: Inglês
ISSN
1556-5068
Autores Tópico(s)Complex Systems and Time Series Analysis
ResumoThis paper presents a dynamic, rational expectations equilibrium model of asset prices where the drift of fundamentals (dividends) shifts between two unobservable states at random times. I show that in equilibrium, investors' willingness to hedge against changes in their own uncertainty on the true state makes stock prices overreact to bad news in good times and underreact to good news in bad times. I then show that this model is better able than conventional models with no regime shifts to explain features of stock returns, including volatility clustering, leverage effects, excess volatility and time-varying expected returns.
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