A Model of Investor Sentiment
Nicholas Barberis, Andrei Shleifer, and Robert Vishny
University of Chicago, Harvard University, and University of Chicago

Abstract
Recent empirical research in nance has uncovered two families of
pervasive regularities: underreaction of stock prices to news such as
earnings announcements, and overreaction of stock prices to a series
of good or bad news. In this paper, we present a parsimonious model
of investor sentiment, or of how investors form beliefs, which is consis-
tent with the empirical ndings. The model is based on psychological
evidence and produces both underreaction and overreaction for a wide
range of parameter values.


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