Financial Markets and Investment Strategies

Theory of the firm: Managerial behavior, agency costs and ownership structure

Common risk factors in the returns on stocks and bonds

A five-factor asset pricing model

A model of investor sentiment /

Abstract Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.