00Thaler_FM i-xxvi.qxd

hence overreacts, sending the stock price to unduly high levels. Subsequent news announcements are likely to contradict his opti ...

The economic interpretation of this evidence has proved more controver- sial, since some authors, particularly Fama and French ( ...

orderly, and usually proportional to numbers calculated from the Bayes Theorem—but it is insufficient in amount. A conventional ...

disappointed in the future when the forecasted earnings growth fails to ma- terialize. This, of course, is what overreaction is ...

untrained in finance) a time series of stock prices and ask them to trade at the prevailing price. After the subjects trade, the ...

empirical studies discussed in section 2, the investor must be using the wrong model to form expectations. We suppose that the e ...

The investor also believes that there is an underlying regime-switching process that determines which regime the world is in at ...

puts a high probability on the event that Model 2 is generating current earn- ings. Since he believes regime switches to be rare ...

suppose that investors view the growth rate of dividends as a parameter that is not only unknown but also changing over time. Th ...

similarly if st=2, we are in the second regime and the earnings shock is generated by Model 2. The parameters λ 1 and λ 2 determ ...

here are and λ 1 =0.1<0.3=λ 2. Note again that the earn- ings stream is generated using the true process for earnings, a rand ...

some combination of Models 1 and 2, neither of which is a random walk. The following proposition, proved in the appendix, summar ...

In Proposition 2, we provide sufficient conditions on p 1 and p 2 for prices to exhibit both underreaction and overreaction, and ...

start by fixing λ 1 =0.1 and λ 2 =0.3. These numbers are small to ensure that regime switches do not occur very often and λ 2 &g ...

On the other hand, if πLand πHare both at the low end, the investor be- lieves that shocks are relatively likely to be reversed, ...

5.2. Some Simulation Experiments One way of evaluating our framework is to try to replicate the empirical findings of the papers ...

The calculation of rn+−rn−for the case of n=1 essentially replicates the empirical analysis in studies such as that of Bernard a ...

return over the nyears, and compute the difference between the return of the best- and the worst-performing deciles for the year ...

An important question is whether our full model, and not just regime 1, is consistent with all of the event study evidence. Mich ...

investors might still underreact to the quarterly earnings announcement given the high weight this number has for predicting the ...