Abstract for: A Model for Overreaction to EPS Shocks in the Stock Markets
Standard finance hypotheses (of which market efficiency hypothesis has been derived) have left no room for human emotions or cognitive errors in financial decision making hence the decision-making human in standard financial models is an economically rational human. It is the knowledge of the consequences these very emotions and errors in financial researches and price and restitution trends in different markets which brought about a movement in financial and investment management which soon became known as Behavioral Finance. Behavioral Finance attempts to identify and explore the anomalies of financial markets. One such anomaly is “overreaction” to news announcement in financial markets. In the model proposed in this paper we have divided the traders of financial markets into two groups of rational and behavioral (momentum) and then have studied the overreaction to the corporations’ newly announced EPS. In this model rational traders cause the stock price to move toward the intrinsic value and behavioral traders bring about the fluctuation of prices.