A New Pseudo-Bayesian Model for Investors' Behaviors in Financial Crises

Abstract

In this paper, we introduce a new pseudo-Bayesian model to incorporate the impact of a financial Crisis and establish some properties of stock returns and investors' behaviors during the financial crisis and during recovery after crisis. Our proposed model can be applied to investigate some important market anomalies including short-term underreaction, long-term overreaction, and excess volatility during financial crisis. We also explain in some detail the linkage between these market anomalies and investors' behavioral biases during financial crisis and during recovery after crisis.

Keywords: Bayesian model, Representative and conservative heuristics, Underreaction, Overreaction, Stock price, Stock return, financial crisis

JEL Classification: G11, C13