From Market Anomalies to Behavioural Finance

Overreaction can result from a rational
expectation model
• In ‘Competing theories of financial anomalies’ Brav
& Heaton (2002) gave a ‘rational’ explanation to
market underreaction and overreaction
• µ
t
= a stock’s dividend at day t, µ
t
= µ (a
constant),but µ is unknown. Investors use a
Bayesian approach to estimate µ . This will result in
overreaction