Asset Price Response to New Information: The Effects of Conservatism Bias and Representativeness Heuristic

摘要

How asset prices react to new information has been a topic of long-standing interest in finance. In this book, Dr. Guo Ying Luo theoretically studies this topic by incorporating two well-known behavioral biases into the standard Grossman and Stiglitz (1980) framework and the Kyle (1985) model. This book is relatively short and is extremely well-organized. In chapter 1, Luo reviews the empirical evidence on underreaction and overre-action in asset prices, and briefly surveys leading behavioral models of underreaction and over-reaction. Chapter 2 shows that in an extended Grossman and Stiglitz (1980) model, conservatism bias can generate both asset price overreaction and underreaction to new information in a perfectly competitive market with noise traders. Chapter 3 illustrates that in an extended Kyle (1985) model, conservatism bias can generate asset price overreaction and underreaction in a market allowing for strategic interaction among rational and conservatism traders. Chapters 4 and 5 basically repeat the analysis in chapters 2 and 3 by replacing conservatism bias with representativeness heuristic. Luo shows that representativeness heuristic can also generate both asset price overreaction and underreaction to new information either in a perfectly competitive market or in a market allowing for strategic interaction among rational and representativeness traders. Finally, chapter 6 incorporates both conservatism and representativeness into a standard static Kyle (1985) model to explain the phenomena of asset price overreaction and underreaction. As we can see, this short book offers new theoretical models of underreaction and overreaction that are different from leading studies such as Barberis, Shleifer, and Vishny (1998), Daniel, Hirshleifer, and Subrahmanyam (1998), and Hong and Stein (1999). In this sense, this book is more of an extended research paper.