New Evidence on Psychology and Stock Returns

The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes

“…An exploration of this point and related issues is beyond the scope of this paper. 33 This is in contrast to REH models, which generate unambiguous quantitative and qualitative time-t predictions of the co-movement between p t+k and x t+k , for each time horizon k. (i) If s t = 1 and x t > 0, then (68) and (69) imply that p t > 0.…”

“…changes in the coefficients, ' t and t , in the representations of F t (d t+1 ) and F t (p t+1 ) unconstrained renders even the model's qualitative predictions ambiguous, in the sense that the model is compatible with both positive and negative co-movement between p t+k and x t+k ; at any time horizon k. 33 Remark 11 The ambiguity of a KUH model's predictions is just another way of stating that, under Knightian uncertainty, the coefficients of the model-consistent representations of participants' forecasts are partly autonomous: they are not completely determined in terms of the model's KU parameters, ; + ; ; b ; b + ; b , its coefficients at time t, t and b t , and the moments of its stochastic innovations.…”

Do Overnight Returns Truly Measure Firm-Specific Investor Sentiment in the KOSPI Market?

“…Also, researchers used various proxies for sentiments, such as market liquidity, IPO data, trading volumes, and news or Twitter data (Baker and Stein, 2004 [45]; Dorn, 2009 [46]; Da, Engelberg, and Gao, 2015 [47]; Liao, Huang and Wu, 2011 [48]). Using these proxies, previous studies estimated the effect of sentiment on subsequent stock returns (Baker and Wurgler, 2006 [11]; Bathia and Bredin, 2013 [49]; Corredor, Ferrer, and Santamaria, 2013 [50]; Gao and Yang, 2017 [51]; Mangee, 2017 [52]; Ryu, Kim, and Yang, 2017 [20]; Schmeling, 2009 [43]; Yang, Ryu, and Ryu, 2017 [21]). In particular, Baker and Wurgler (2006) [11] measured market-wide investor sentiment using a principal component analysis of sentiment proxies (i.e., closed-end fund discounts, the turnover ratio, the number of initial public offerings (IPOs), the first-day returns of IPOs, dividend premiums, and the share of total equity and debt issues that are equity issues).…”

The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes

“…Thus, under Knightian uncertainty, predictions of co-movements in time-series data are necessarily contingent. An exploration of this point and related issues is beyond the scope of this paper 33. This is in contrast to REH models, which generate unambiguous quantitative and qualitative time-t predictions of the co-movement between p t+k and x t+k , for each time horizon k.…”