What Hundreds of Economic News Events Say About Belief Overreaction in the Stock Market
We measure the nature and severity of a variety of belief distortions in market reactions to hundreds of economic news events by estimating a structural asset pricing model combined with algorithmic machine learning to quantify bias. We find that investors systematically overreact to perceptions about multiple fundamental shocks, a phenomenon we show can dampen rather than amplify market volatility via a shock composition effect. Such shock composition effects can lead the market to underreact to news, even when investors overreact to all shocks.
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Copy CitationFrancesco Bianchi, Sydney C. Ludvigson, and Sai Ma, "What Hundreds of Economic News Events Say About Belief Overreaction in the Stock Market," NBER Working Paper 32301 (2024), https://doi.org/10.3386/w32301.Download Citation
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