Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model

Pietro Veronesi
The Review of Financial Studies
Vol. 12, No. 5 (Winter, 1999), pp. 975-1007
Stable URL: http://www.jstor.org/stable/2645973
Page Count: 33
  • Download ($42.00)
  • Cite this Item
Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model
Preview not available

Abstract

This article presents a dynamic, rational expectations equilibrium model of asset prices where the drift of fundamentals (dividends) shifts between two unobservable states at random times. I show that in equilibrium, investors' willingness to hedge against changes in their own "uncertainty" on the true state makes stock prices overreact to bad news in good times and underreact to good news in bad times. I then show that this model is better able than conventional models with no regime shifts to explain features of stock returns, including volatility clustering, "leverage effects," excess volatility, and time-varying expected returns.

Page Thumbnails

  • Thumbnail: Page 
[975]
    [975]
  • Thumbnail: Page 
976
    976
  • Thumbnail: Page 
977
    977
  • Thumbnail: Page 
978
    978
  • Thumbnail: Page 
979
    979
  • Thumbnail: Page 
980
    980
  • Thumbnail: Page 
981
    981
  • Thumbnail: Page 
982
    982
  • Thumbnail: Page 
983
    983
  • Thumbnail: Page 
984
    984
  • Thumbnail: Page 
985
    985
  • Thumbnail: Page 
986
    986
  • Thumbnail: Page 
987
    987
  • Thumbnail: Page 
988
    988
  • Thumbnail: Page 
989
    989
  • Thumbnail: Page 
990
    990
  • Thumbnail: Page 
991
    991
  • Thumbnail: Page 
992
    992
  • Thumbnail: Page 
993
    993
  • Thumbnail: Page 
994
    994
  • Thumbnail: Page 
995
    995
  • Thumbnail: Page 
996
    996
  • Thumbnail: Page 
997
    997
  • Thumbnail: Page 
998
    998
  • Thumbnail: Page 
999
    999
  • Thumbnail: Page 
1000
    1000
  • Thumbnail: Page 
1001
    1001
  • Thumbnail: Page 
1002
    1002
  • Thumbnail: Page 
1003
    1003
  • Thumbnail: Page 
1004
    1004
  • Thumbnail: Page 
1005
    1005
  • Thumbnail: Page 
1006
    1006
  • Thumbnail: Page 
1007
    1007