2024/14 | LEM Working Paper Series | ||||||||||||||||
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Pricing anomalies in a general equilibrium model with biased learning |
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Andrea Antico, Giulio Bottazzi and Daniele Giachini |
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Keywords | |||||||||||||||||
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Momentum; Reversal; Biased Learning; Bayesian Learning; Model Misspecification
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JEL Classifications | |||||||||||||||||
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G41, D53, G12, G14
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Abstract | |||||||||||||||||
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We investigate the emergence of momentum and reversal anomalies in a
general equilibrium model with complete markets and cognitively biased
agents, accounting for the presence of representativeness heuristic,
conservatism, and anchoring and adjusting in their beliefs. We
characterize anomalies by studying return autocorrelation patterns,
price gaps following sequences of different events, and relative
performances of suitably defined portfolios. These three
characterizations are not equivalent. They capture different aspects
of mispricing and relate differently to the behavioral heuristics that
we consider. Overall, the model is generically able to reproduce the
empirical evidence of momentum profits that subsequently revert.
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